ECONOMIC OUTLOOK

While South Africa attempts to kick-start its economy, control government spending, improve state capacity and avoid credit rating downgrades, economic recovery remains slow. And, according to the experts, the country faces several weighty challenges that will continue to hamper economic growth.

In February, the International Monetary Fund downgraded South Africa’s growth forecast from 2.2 to 1.9 per cent in 2022. e South African Reserve Bank (SARB) also revised its growth forecasts downwards to 1.7 per cent in 2022, 1.8 per cent in 2023 and 2.0 per cent in 2024. e SARB announced in its latest Monetary Policy Statement that it will continue with monetary policy tightening towards 2024, with another 50 basis points (bps) of tightening this year. It also hinted at additional hikes in 2022, 2023 and 2024.

Reserve Bank Governor Lesetja Kganyago cited higher oil prices, higher electricity and other administered prices, higher wage demands, stronger services in ation and potential further upside surprises in global producer and food prices as reasons for the rate hike. e risk of a faster than expected pace for global policy rate normalisation and quantitative tightening, leading to large capital out ows from emerging markets such as South Africa, were named as additional reasons.

Kganyago warned that the damage caused by the slow pace of vaccinations, the July unrest, cyberattacks on Transnet and countrywide strikes were also some of the factors that led to the SARB’s downward revision of the country’s growth forecast for 2021 – from the 5.2 per cent forecast in November to the 4.8 per cent announced in the MPC.

THERE’S BOTH GOOD AND BAD NEWS

However, Absa Corporate Investment Bank (CIB)’s South Africa

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FISCAL RISKS

South Africa is seemingly emerging from the COVID-19 pandemic, but the country’s growth prospects remain constrained in the face of a rather hostile global environment, writes uletho Zwane

Macroeconomics Quarterly Perspectives released in February shows a more optimistic outlook for the current scal year “mainly due to a tax overshoot of R180-billion”, it reads.

Absa CIB chief economist Peter Worthington said the R180-billion will lead to a lower main budget de cit forecast of R344-billion or 5.5 per cent of gross domestic product (GDP).

“ e near-term scal outlook has improved since then. By way of comparison, the MTBPS forecast for Financial Year 2021/2022 was R410-billion or 6.6 per cent of GDP.

“ is better-than-expected outcome is due mainly to a huge li in corporate income tax (CIT) receipts from buoyant commodity prices, which have raised mining houses’ operating surpluses sharply,” said Worthington.

He added that December’s main budget data were particularly strong, especially “with CIT receipts in the second provisional tax payment month of the year coming in near their record highs registered in June”. In addition, personal income taxes have also been surprisingly robust against a backdrop of sharply lower employment levels.

However, Worthington said even with the slightly positive revenue outlook, against a backdrop of weak growth, South Africa still faces signi cant scal challenges.

Absa CIB senior economist Miyelani Maluleke said the country’s debt dynamics remain a challenge. He warned that the debt burden is likely to continue to rise over the next few years, even with scal stringency. is is because South Africa runs a primary budget de cit, and the interest rate on government debt is bigger than the growth rate of the economy.

“ e real interest rate on South Africa’s government debt exceeds the trend real GDP growth rate, meaning that South Africa’s debt-to-GDP ratio will continue to grind higher over the next few years,” he explained.

Analysts have also warned that big scal risks not only lie in the current nancial year, but also in the consolidation targets for upcoming scal years, particularly given big upside spending risks. Among the spending risks highlighted are public sector wage settlements, enhanced income support for low-income South Africans and further bailout demands from nancially challenged state-owned enterprises and municipalities.

Government’s current negotiations on a new wage deal with public sector unions and the Constitutional Court’s failure to rule on government’s refusal to implement the third year of the 2018 wage deal remain a signi cant scal threat since National Treasury’s expenditure framework remains predicated on an unlikely pay freeze for public sector workers.