Disappointingly, there is material fiscal slippage relative to the Budget initially read in February 2018. A main budget deficit of -4.4% of GDP is projected for 2018/19, compared with the initial estimate of -3.8% of GDP. The deficit increases to -4.7% of GDP in 2019/20. This compares with an estimated deficit of -3.8% of GDP for 2019/20 projected in February last year.
Following fiscal year 2019/20, the deficit does decline a little, but remains wide at -4.55 of GDP in 2020/21 and -4.3% of GDP in 2021/22.
The consolidated budget deficit also remains wide, increasing to 4.5% of GDP in 2019/20 from 4.2% of GDP in 2018/19, before easing to 4.0% of GDP by 2021/22.
Also, after accounting for the borrowing requirement of SOCs and municipalities the total public sector borrowing requirement is 6.5% of GDP in 2018/19, which declines in 2021/22, but remains elevated at 5.5% of GDP.
Worryingly, the main budget primary deficit (revenue less non-interest spending) increases to -1.0% of GDP in 2019/20 from -0,8% in 2018/19 and remains in deficit over the medium term. Accordingly, the government’s debt ratio continues to increase.
Specifically, the gross loan debt is projected to increase to 56.2% of GDP at end 2019/20 from 55.6% of GDP at end 2018/19. Note that the government’s borrowing requirement in 2019/20 is partially funded by running down its cash balances by R71.6 billion. Hence, its net debt ratio (gross loan debt less cash balances) increases faster than the gross loan debt ratio – from 49.9% of GDP at end 2018/19 to 52.3% of GDP at end 2019/20.
Ultimately, the gross loan debt ratio only stabilises in 2023/24 at a projected level of close to 60% of GDP.
Government gross loan debt
Source: SA Reserve Bank, SA National Treasury
The debt level, in itself is not especially high relative to GDP. However, given persistent sovereign debt rating downgrades the real interest rate government pays on new debt is high relative to GDP. Hence, in the absence of a substantial improvement in the primary budget balance, the debt level can only be stabilised over time should the real interest rate on debt decline relative to the real GDP growth rate.
But, at present, the ratio of debt servicing cost to main budget revenue continues to increase – from an already high 14.2% of revenue in 2018/19 to 15.2% of revenue in 2021/22.
The clearest path to changing this unsustainable path would be to improve South Africa’s sovereign debt ratings or to lift real GDP growth. The former is hardly likely under current conditions, while the latter is difficult given high real interest rates and a situation in which the government is absorbing a large share of available savings to fund itself.
It should be noted that the support for state owned companies is (almost) deficit neutral. But, the point is this support is preventing expenditure saving measures elsewhere from lowering the budget deficit and constraining the level of borrowing. The build-up in off-balance sheet contingent liabilities and the accompanying deterioration in the public sector’s balance sheet are now preventing the National Treasury from sticking to its fiscal consolidation path.
Government guarantees to public institutions amount to R483.1 billion of which current exposure amounts to R372.4 billion. Eskom’s guarantees amount to R350 billion (with an exposure of R294.7 billion).
Other contingent liabilities include post-retirement medical assistance to government employees (an estimated present value of R69.9 billion), legal claims against government departments (R28.7 billion) and obligations for the Road Accident Fund (which increased by R76.9 billion to R216.1 billion in 2018/19).