The make-or-break issue for Tito Mboweni and South Africa
Investment banking company UBS is relatively positive on South Africa’s economic recovery heading into Finance minister Tito Mboweni’s budget, but it has warned that the country’s hopes are pinned to the successful negotiation of a massively reduced public wage bill.
The group estimates that the South African economy grew by 5.5% in Q4 2020 following the 66% q/q annualized rebound in Q3.
In a research note on Wednesday (10 February), the group said that recovery has translated into stronger than budgeted revenue growth, which reached 3% y/y in Q4 2020.
It expects that revenue collections are expected to overshoot budget estimates, and could take the pressure off the National Treasury to raise taxes to pay for the acquisition and rollout of coronavirus vaccines.
However, the fairly high tax buoyancy assumptions do not mechanically translate to continued revenue outperformance in 2021/2022, the group said – meaning it sees the boost more as a one-off rather than a fundamental shift.
“The forthcoming three-year public sector wage negotiations remain critical to the government’s fiscal strategy, accounting for R275 billion of the R300 billion reduction in primary expenditures planned over the next 3 fiscal years, ” the group said.
“It is unlikely that the negotiations can be concluded before the Budget on 24 February. Indeed, negotiations could persist for several months ahead.”
Wages and debt
UBS said that the structure of government spending is heavily tilted towards two items that jointly make up almost half of total spending: public sector wages, and debt service costs.
It noted that the 2020 Medium Term Budget Policy Statement made two key assumptions about these:
- The government is planning a nominal wage freeze in the public sector for 2021-23 (translating into 0.8% average annual growth in 2021-23, given natural pay/rank progression);
- Debt service costs are foreseen as the fastest growing expenditure item (16% per annum average growth in 2021-23 and reaching 16.5% of total spending).
“The budget consolidation, in our view, is not possible without controlling the wage bill,” UBS said.
The planned R300 billion primary expenditure savings in 2021-23 will essentially come from the proposed public sector wage freeze, UBS said.
“The accumulated savings from public sector wages amount to R275 billion in the same period – with stabilising the wage bill around R640-R655 billion per annum.
“While the Labour Court’s decision to rule against the union’s demand for the 2020 public sector wage hike helped the fiscus – though unions have taken the case to the Constitutional Court – the ultimate success will depend on the outcome of the 2021-2023 public sector wage negotiations.”
Ratings warning
Credit ratings agency Moody’s has also fingered the wage bill as one of a number of financial issues facing South Africa in the run-up to finance minister Tito Mboweni’s budget speech later this month.
In November 2020, the agency cut the nation’s foreign- and local-currency ratings to Ba2, two levels below investment grade, from Ba1. The outlook remains negative.
In the same month, ratings agency Fitch cut South Africa’s foreign- and local-currency ratings to BB-, three levels below investment grade, also with a negative outlook.
In a note published this week, Moody’s said that it will likely downgrade South Africa further if its debt burden continues to grow.
The coronavirus pandemic has exacerbated the deterioration of South Africa’s government finances because it weighed on revenue collection, raised the cost of borrowing and pushed the economy into its longest recession in almost three decades.
“South Africa’s credit profile is increasingly constrained by strong, widespread fiscal pressures, including rising borrowing costs and persistently low growth. Progress on structural economic reforms has been limited amid social and political obstacles,” it said.
It added that a lack of reforms, shocks to primary expenditure or revenues, or sustained rises in the level or volatility of interest rates could lead to another downgrade.
Moody’s said that a ratings upgrade is unlikely in the near future, but that it could change its outlook from ‘negative’ to ‘stable’ if government shows that its reforms are effective.
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