South Africa’s Fiscal Outlook Clouded by Wage Costs –Fitch
The South African government’s projection that government debt/GDP will rise to 77.7% in the fiscal year ending March 2026 (FY26) is broadly in line with Fitch Ratings’ forecasts.
However, the global rating firm said it believes the risk that the government fails to meet its ambitious fiscal targets is significant, with wage cost control set to be particularly challenging.
The government’s medium-term budget policy statement (MTBPS) raised the projected fiscal deficit for FY24 to 4.9% of GDP, from 4% in the 2023 Budget, it noted.
Analysts said this was largely due to weakness in revenue collection, as problems with power generation and freight rail have constrained economic activity and windfall revenues from strong commodity prices have dropped off.
The revenue shortfall is broadly in line with projections, with revenue seen reaching 27.3% of GDP in FY24, against September forecast of 27.1%.
“We still view the government’s target of achieving a primary budget surplus this year as realistic. Our medium-term forecasts match MTBPS projections, with revenue plateauing at around 27% of GDP, from 28.2% in FY23, though the risk it falls short of this target remains significant given the weak economic environment”, Fitch explained.
The MTBPS raises the medium-term projection for government debt/GDP, bringing the government’s figure closer to Fitch’s September forecast that the ratio will hit 78.5% in FY26.
Both figures are slightly higher than the 76.9% Fitch had assumed in July when Fitch Ratings affirmed South Africa’s rating at ‘BB-’ with a Stable Outlook, and well above the government’s initial forecast of 73.6% in the 2023 Budget.
Nonetheless, analysts said they believe the MTBPS assumptions around public-sector wage growth may be overly optimistic, pointing to risks of higher government debt.
The government projects a consolidated wage bill increase of 5.1% for FY24 and 2.2% for FY25, lower than the 7.5% pay increase for FY24 and the CPI-linked increase for FY25 contained in the last public-sector wage agreement. Fitch forecasts CPI inflation to reach 5% in FY25.
According to Fitch, the target could still be reached, for example, through headcount reductions, but South Africa’s general election in May 2024, resistance from unions and high underlying socio-political risks will make significant headcount reduction difficult.
The government has also revised down its figures for total non-interest expenditure by ZAR37.3 billion (0.5% of GDP) in FY25 and ZAR47.7 billion (0.6% of GDP) in FY26.
Part of this would come from a rationalisation of government departments, entities and programmes over the next three years, although details have not been provided yet.
The MTBPS also announced that tax measures would be forthcoming in the 2024 budget. However, Fitch believes pushing through substantial change ahead of the elections will be politically difficult, while post-election reforms are likely to be contingent on the election outcome.
Fitch said there is also some risk that contingent liabilities associated with distressed state-owned enterprises could crystallise on the government’s balance sheet.
It noted that this is not Fitch baseline scenario, but state-owned infrastructure company Transnet posted an annual loss of ZAR5.7 billion in FY23 and in October indicated that it was seeking an equity injection from the government.
Bloomberg reports that the firm is seeking over ZAR100 billion (1.4% of GDP) in government financing over the next two years, which, if secured, would compromise achieving MTBPS targets.
South Africa’s credit profile remains supported by a favourable debt structure, with long maturities and denominated mostly in local currency, as well as a credible monetary policy framework.
However, a durable resolution of its fiscal challenges would require a substantial acceleration of growth. Fitch projects only a minor strengthening in GDP growth to 0.9% in 2024 and 1.3% in 2025, from 0.5% in 2023, presenting challenges for fiscal consolidation.
