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Supplementary Budget Review

25 June 2020 Reza Hendrickse, Portfolio Manager at PPS Investments

Today’s Supplementary Budget Review painted a bleak picture as expected, coming as no surprise given that conditions have deteriorated from the already weak position prior to the crisis. Even with the countercyclical fiscal and monetary measures implemented, including the R500 billion COVID-19 support package, rate cuts and easing of financial conditions, our position remains tenuous.

The Budget spoke to a dim economic outlook, with National Treasury now expecting the local economy to shrink by 7.2% in 2020, its largest contraction in almost a century. Even this is arguably optimistic, however, in light of the International Monetary Fund’s (IMF) updated forecast of -8.0% this year, with a relatively muted 3.5% rebound next year. This is against the backdrop of global growth being expected to contract 5.2% in 2020.

With all eyes on the state of our public finances, the Budget outlined spending reprioritisation, however the glaring issue being faced currently is that revenue collection has collapsed. Tax collections are likely to miss this years’ target by R300 billion, leading to the consolidated budget deficit reaching 15.7% of GDP for the 2020/21 year. This is more than double the forecast from February.

As a result, the debt trajectory has steepened, and National Treasury now expects government borrowing to be close to 81.8% of GDP this year, eclipsing the previous 65.6% forecast. Borrowing will be supplemented by $7 billion, which the government intends to borrow from multilateral finance institutions, including $1 billion from the New Development Bank and $4.2 billion from the IMF.

In his speech, the Minister emphasised the burden of borrowing that will need to be repaid in the future. Contextualising our level of indebtedness, he commented on the reality of countries facing sovereign debt crises, once borrowing reaches unsustainable levels. He also made reference to examples such as Argentina, Zimbabwe, Greece and Germany in the 1920’s, which faced these challenges, but stated the intention to avoid this path.

Although our debt levels are not extreme by developed market standards, the unfortunate reality is that South Africa’s funding rate is around a 4% real rate, compared to some developed markets which are able to borrow at a real rate of zero or less. This amplifies the drain on resources significantly compared to developed markets. Putting a positive spin on the current situation, the Government boldly expects debt to stabilise going forward, at 87.4% of GDP in 2023/24, and intends to narrow the deficit, and target a primary surplus.

Not much detail was offered on tackling the troubled SOE’s, or how the public sector wage bill will be addressed, but the Governor stated R3 billion would be channelled into Land Bank in order to help recapitalise the institution, given its importance. Regarding public sector wages, Minister Senzo Mchunu is also in talks with labour movements to find a balanced way forward. Overall, the Medium-Term Budget Policy Statement will seek to follow a zero-based budgeting principle, that aims to reduce all expenditure thought to no longer be affordable.

This Supplementary Budget made it clear that public finances are currently overstretched and that over the coming months, government will need to detail far-reaching reforms. Reprioritising expenditure is however not sufficient to tackle the current situation, and greater action is needed in order to curtail spending. Unfortunately, we continue to face the conundrum of needing to stimulate growth in the face of austerity. And unfortunately, we can expect to see some tax increases in the forthcoming medium-term expenditure framework.

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