South Africa's Finance Minister not expecting a downgrade - CNBC Africa

South Africa's Finance Minister not expecting a downgrade

Southern Africa

by Thabile Manala 0

South Africa’s central fiscal objective is to stabilise the growth of debt as a share of GDP. Photo: Flickr

South Africa’s central fiscal objective is to stabilise the growth of debt as a share of GDP.

In the Budget Speech earlier this year, the government made commitments to a medium term fiscal policy package that would ensure a sustainable foundation for public finances.

The government held true to these commitments as the main budget expenditure remained within the 2014/2015 limits and is expected to stay on track within the spending ceiling in the current year.

According to the Minister of Finance, Nhlanhla Nene, “In the aftermath of the 2008 recession, the budget deficit widened sharply to support our economic recovery. The deficit has since narrowed and is expected to be 3.8 per cent of GDP this year, falling to 3 per cent over the medium term.”

Nene noted that after the recession, government debt increased from 26 per cent of GDP to 47 per cent in March this year. He further tabled the projection that debt will rise by a further R600 million over the next three years, while stabilising as a percentage of GDP.

The finance minister has proposed a “spending ceiling” that ought to be linked to South Africa’s long-term economic growth projections. “Discipline has sustained us to remain within limits,” said Nene. No resources will be added to the spending ceiling over the next two years, he added.

Two risks since the earlier budget speech have since emerged, a public-sector wage agreement significantly above inflation and a deterioration in economic performance. The fiscal framework has managed to absorb these developments and stays on course to realise its objectives.

Nene admitted that the public sector wage bill that provide additional benefits for public servants by 10.1 per cent are not sustainable over the long term. This is especially without corresponding improvements in the quality of public services. The Budget assumed the wage agreement would not deviate too far from inflation.

The main threats to fiscal outlook are a further deterioration in economic growth, as any decline in growth typically results in falling revenue growth increasing the deficit and debt as a share of GDP. Inflationary pressures as that would increase the risk of unplanned expenditure and the weak financial positions of several major public entities.

The projected long-term fiscal guideline has entrenched the principles of counter-cyclicality, debt sustainability and intergenerational fairness. The main objective would be to enable government to act within its available resources.

Given the downward revision to the growth forecast, there are looming fears of rating agencies downgrading South Africa. The finance minister, addressed these concerns that, “It is not possible to please rating agencies all the time, we have stayed the course regardless of volatility. I don’t expect a downgrade.”