Fitch Ratings calls Budget optimistic; analyst says it was compromised

Ratings agency Fitch Ratings says Budget 2024 was optimistic, while government’s latest fiscal projections indicated budget deficits for the next two years that will be smaller than previously forecast.

Prof Bonke Dumisa, an independent economic analyst, says National Treasury is usually very pragmatic in its National Budget figures, but 2024 is a very tricky national and provincial election silly season.

“What Fitch is saying is that even our usually very pragmatic, realistic and trustworthy National Treasury may have been compromised on its National Budget figures to avoid this year’s National Budget labelled ‘an austerity budget’ or a ‘conservative cost reduction budget’ by its opponents,” he says.

Fitch Ratings agency points out assumptions on revenue growth appear optimistic and state-owned enterprises are likely to require additional support that is not factored into the budget’s debt forecasts.

“Consequently, our own fiscal projections remain more conservative than government’s, even considering transfers from an account held with the South African Reserve Bank (Sarb).”

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Consolidated deficit higher now than with MTBPS

The budget projects the consolidated deficit to reach 4.9% of gross domestic product (GDP) in the fiscal year ending March 2024, 4.5% in the 2024 financial year and 3.7% in 2025 financial year compared to the figures in the Mid-Term budget Policy Statement (MTBPS) of 4.9% for the financial year ending in March, 4.6% for 2024 and 4.2% for 2025.

Consequently, Fitch Ratings points out, the authorities now expect gross debt/GDP to increase to 75.3% in the 2025 financial year which is lower than the previous forecast of 77.7%.

“The changes are mainly revenue-driven, with revenue/GDP at 27.5% in the 2025 financial year, compared to 27.1% in the MTBPS. We see non-interest expenditure forecasts, including the wage bill and social grants, as realistic.”

On the other hand, Fitch Ratings believes that the revised projections for revenue and the deficit for the 2024 and 2025 financial years are optimistic.

“When we affirmed South Africa’s rating at ‘BB-’ with a Stable Outlook in January 2024, we projected that the fiscal deficit would reach 4.8% of GDP in the 2024 financial year and 4.6% in 2025.”

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No additional budget for Transnet, but further fiscal support required, Fitch Ratings says

Fitch Ratings also points out that government is not budgeting for additional support to Transnet beyond the R47 billion guarantee granted in December 2023, but it estimates that further fiscal support may be required in the coming fiscal years to address the company’s entrenched operational and financial problems and contribute to its turnaround strategy.

“In our previous review, we assumed this support would take the form of a debt transfer to the sovereign, of R50 billion split between the next two years.”

Fitch Ratings also does not think dipping into the country’s forex and gold reserves is a good idea. Government will draw down some of the valuation gains in its Gold and Foreign Exchange Contingency Reserve Account (GFECRA) at the Sarb, up to R100 billion in the 2024 financial year and R25 billion in the next two financial years.

This will reduce debt accumulation by about 2 percentage points of GDP by the end of the 2026 financial year. The GFECRA, which captures valuation gains or losses on South Africa’s foreign-currency reserve transactions, held R507.3 billion in January 2024.

“Although gross debt will be lower than it would have been otherwise, all else being equal, the impact on the sovereign credit profile will be limited as the move does not address underlying issues driving the government’s debt accumulation or the sovereign’s other main rating drivers, including South Africa’s low economic growth potential, persistent and large fiscal deficits, elevated public debt and exceptionally high levels of poverty and inequality.”

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GFECRA drawdown will lower gross debt/GDP by around 2 percentage points

In Fitch Ratings’ previous review, it expected gross debt/GDP to reach 83.2% in the 2025 financial year, although the GFECRA drawdown will lower this by around 2 percentage points.

“The authorities are still conducting consultations on a proposed new fiscal rule, but the budget indicated that a debt-stabilising primary surplus will anchor fiscal policy in the medium term,” Fitch Ratings says.

“The introduction of new fiscal rules could help promote fiscal sustainability in the longer term, but their influence on the sovereign credit profile would depend on how binding the constraints are and the depth of political support for them.”