South Africa: fiscal consolidation slows but medium-term objectives stable

The pace of fiscal consolidation in South Africa will be slower than government forecasts, as weaker than expected economic growth and a rising public sector wage bill act as fiscal headwinds, according to Moody’s Investors Service.

Despite the slower pace of fiscal consolidation and medium-term deficit, the new report by Moody’s says targets remain within reach and, if met, will support a stabilization of debt levels and reinforce the ratings agency’s assessment of the sovereign’s fiscal and institutional strengths.

 “We expect a slower pace fiscal consolidation than the Government of South Africa is forecasting,” said Lucie Villa, a Moody’s Vice President and  Senior Credit Officer, who is the co-author of the report. “Growth this year is expected to be lower than the government’s own estimates, weighing on tax revenues, while the public sector wage agreement in June also brings extra, unbudgeted costs.”

Moody’s expects a fiscal deficit of around 4.0% of GDP in 2018-19, implying a 0.4 percentage point of GDP shortfall from government targets.

However, Moody’s expects the government to hit its 3.5% fiscal deficit target by 2020-21, with debt likely to stabilize at around 56% of GDP. Moody’s also expects that near-term fiscal adjustments will be made on the spending side based on the government’s record of operating within spending ceilings and undershooting revenue targets.

Improved tax collection led by the South African Revenue Service will allow revenue to take more prominence in the longer term fiscal consolidation path. Rising interest costs in the context of investors taking a more risk averse stance towards emerging markets are a main risk to Moody’s fiscal forecasts, together with potential support to state-owned-enterprises.