Finance Minister Tito Mboweni’s Supplementary Budget Speech was delivered with the primary aim of giving clarity on the current financial state of the country. Yet, he left us with more questions than answers. One thing we do know, however, is that the hippo in the room is South Africa’s soaring debt and its associated costs.
Mboweni noted that the historic nature of the pandemic has made it necessary to table an adjustment to his 2020 National Budget, delivered in February this year. In February 2020 the global economy was expected to expand by a healthy 3.3%. Just four months later we are expecting a global contraction of 5.2%. This will mean that global per capita income will see its biggest collapse since 1870. South Africa is going to be particularly hard hit as its economy is expected to contract by 7.2%. With unemployment figures already standing at 30.1%, this could be potentially catastrophic for South Africa’s employment figures.
However, it would appear that markets had already factored in these numbers, as there was very little movement in the wake of Mboweni’s speech. The rand was weaker, but that was more due to the market’s risk-off sentiment for the day. Bond markets strengthened on the news as Mboweni indicated going outside South Africa to raise finance to fund the country’s COVID-19 relief efforts. Treasury is seeking to raise US$7 billion from international finance institutions to support its pandemic response.
Projected total consolidated budget spending, including debt servicing costs, will exceed R2 trillion for the first time ever in South Africa’s history. Gross tax revenue collected during the first two months of 2020/21 totaled R142 billion, falling short of the initial forecast of R177.3 billion – a deficit of R35.3 billion. In addition, Treasury is expecting a gross tax shortfall for the financial year of more than R300 billion as they revised the year’s expected tax revenue from R1.43 trillion down to R1.12 trillion. The country’s gross national debt is expected to be close to R4 trillion by the end of the fiscal year, 81.8% of GDP. This figure is up from the projected 65.6% of GDP projected in February.
THE MOUTH OF THE HIPPOPOTAMUS
South Africa’s debt-to-GDP of 81.8% in 2020/21 is expected to grow to 87.4% by 2023/24. Management of this level of debt is going to require a massive amount of fiscal consolidation over the medium term. We unfortunately did not get much clarity on how this will be achieved.
Mboweni did, however, drill home the urgency of getting the country’s debt under control, as he gave the powers that be a stark warning around the potential debt crisis facing South Africa when he said: “Our Herculean task is to close the mouth of the hippopotamus! It is eating our children’s inheritance. We need to stop it now!”
Currently South Africa’s debt payments amount to 21c of every rand in tax revenue collected. Debt servicing costs are going to rise from R204.8 billion last year to R236.4 billion in this fiscal year. By 2022/23 debt servicing costs will make up 5.4% of the country’s GDP, at R301.1 billion.
The path forward was short on detail. Feeding schemes, medical facilities and education were listed as priorities, as was the clamping down on corruption.
The minister emphasised that Treasury would aim to stabilise debt by the 2023/24 financial year, although we believe this to be an ambitious target given the current tax shortfalls and our increasing debt levels. Mboweni committed to zero-based budgeting across departments in tandem with spending cuts of around R230 billion over the next two years. There was no mention of state-owned enterprises, except for the recapitalisation of the Land Bank, which will be allocated an additional R3 billion. The only mention of power utility, Eskom, was that it would need to show progress in meeting its milestones, which have been laid out in its roadmap. “This is non-negotiable,” Mboweni stressed. Mboweni spoke about investment into infrastructure to boost the economy, with government having already committed R100 billion over the next 10 years. A last measure was the reduction in long-term interest rates to allow business and households to support economic growth.
We believe these solutions were very broad and rather short on any specifics. We are, however, expecting more detail in the Medium Term Budge Speech which will be presented in October this year. What is concerning is the massive execution risk facing the country. We have heard Mboweni promise numerous plans to reduce spending, debt, and corruption, but we see little evidence in support of these efforts.
INCREASED PERSONAL INCOME TAX
The Supplementary Budget has highlighted that tax measures of R40 billion will be required over the next four years. Mboweni noted that any new tax regulations will only be announced in his 2021 Budget Speech, however, the Supplementary Budget Review has suggested there will be tax increases amounting to R5 billion in 2021/22, R10 billion in 2022/23, R10 billion in 2023/24 and R15 billion in 2024/25. Although nothing concrete has been said, we need to be cognisant of a potential wealth tax being imposed in the 2021/22 financial year. This may come in the form of a tax increase or a one-off special tax levy.
In addition, we believe the South African Revenue Service (SARS) is going to be taking a far harder stance on collecting third-party data and tightening up its administrative processes to ensure that tax avoiders are not falling through the net, both locally and internationally.
Mboweni has a mammoth task ahead of him, to not only support the citizens of the country, but also the economy during the COVID-19 pandemic. South Africa, which was already in the economic doldrums, is going to find it very difficult to find its footing without the support of global markets, which are also straining under the impact of this virus. For government to make any headway in terms of boosting the economy, it requires clear and precise policies that work towards reducing debt, while boosting economic activity and job creation.
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