SA economy proves bigger than thought, debt ratio lower

Statistics SA has released data showing the level of SA GDP was 11% larger in 2020 than previously thought. This has significant implications for South Africa’s fiscal ratios.

Three points stand out:

1. If we stick to the medium-term expenditure ceiling outlined in February 2021, our National Budget relative to GDP improves.
2. Government’s estimated gross loan debt at the end of fiscal year 2020/21 now stands at 71% of GDP, compared with 79% of GDP as previously thought.
3. GDP per capita is higher than previously calculated.

The adjustment is favourable to key factors considered by ratings agencies

Statistics South Africa notes GDP per capita, in current prices, was R79 913 in 2015, compared with the previous estimate of R73 209. Income per capita and the debt ratio are important considerations for sovereign debt ratings. All else equal, the implied improvement in these metrics is, therefore, a favourable development, which should ease, although not eliminate sovereign debt ratings risk.

Commodities boosted the Budget further but the July protests are a dampener

At the same time, the commodities bounce has contributed significantly to stronger than expected revenue collection in the fiscal year to date. Main Budget revenue could possibly be up to R100 billion better in 2021/22 than initially expected.

Taking the above into consideration, while also adjusting for the additional spending announced following the July protests and the upward adjustment to the government wage bill, the Main Budget balance is expected to amount to -6.9% of GDP in 2021/22, down from -9.9% of GDP in 2020/21.

The confluence of favourable factors has flattened the debt trajectory

This improvement should be sufficient to stabilise the debt ratio in 2021/22 at close to 71% of GDP. Indeed, the debt ratio may even decline a notch. The lower debt ratio implies a slightly lower primary budget surplus is required to stabilise the debt ratio, assuming other factors, which determine the debt trajectory, including the real interest rate on debt and real GDP growth, remain unchanged.

Looking ahead, the primary budget balance (revenue less non-interest spending) is expected to improve from a deficit of -2.7% of GDP in 2021/22 to a small surplus by 2023/24. This assumes the announced fiscal consolidation path remains broadly intact. It must also be pointed out, though, that new debt continues to be issued at higher real interest rates than the current trend growth rate in real GDP. And, the expected improvement in the primary budget balance over the medium term is not sufficient to stabilise the debt ratio. Accordingly, the debt ratio continues to drift higher three years out. Even so, the projected upward trajectory in this ratio is a lot flatter than recorded in the past decade.

What we have here is an opportunity to change the narrative
Overall, these developments, together with South Africa’s recently announced SDR allocation from the IMF of US$4.2 billion, create an opportunity to begin changing the narrative around South Africa’s fiscal position. The latter expands the government’s policy options and may, possibly, be used to fund foreign currency commitments or maturing debt.

The missing ingredient is sustained firmer economic growth. From this perspective the downward revision to South Africa’s fixed investment ratio to just 15% of GDP in 2020 is a concern. Investment needs to lift to increase the potential growth rate. This serves to highlight the need to follow through vigorously on economic reforms announced in transport, energy, telecommunications and water with the goal of improving efficiency and reducing the risk of continuous state-owned entity bail-outs.

The end goal should be to lift trend real GDP growth, while working towards stabilising and, in time, improving South Africa’s sovereign debt rating. If achieved, the latter should lower borrowing costs. Together with higher growth this would reduce the extent of adjustment required in the primary Budget balance to return the economy to fiscal sustainability.