According to the Medium Term Budget Policy Statement (MTBPS), the budget deficit as a percentage of gross domestic product (GDP) is expected to narrow from 4.2% in the current year to 3% in 2016/17.
While the current account deficit remains high at 6.5% of GDP, it is projected to move closer to 6% in the medium term “as investment growth continues to outpace increases in domestic savings”.
Ratings agencies have been watching South Africa’s twin deficits budget and current account closely for signs of any further deterioration.
The new budget format has introduced core information in line with the International Monetary Fund’s Government Finance Statistics Manual and provides detail of operating activities, capital and infrastructure investment and transactions in financial assets and liabilities, including extraordinary receipts and payments.
The implementation of these changes resulted in an inclusion of extraordinary receipts of R11.4bn and extraordinary payments of R0.2bn for 2013/14.
“As a result, there is a technical improvement in the fiscal deficit of 0.3% of GDP. “Despite pressures facing the public finances as a result of external volatility and domestic spending pressures, we are resolute in our commitment to fiscal discipline,” the MTBPS reads.
According to National Treasury, counter-cyclical fiscal policy resulted in a widening budget deficit and increased borrowing as South Africa was faced by recession and then a period of slow growth.
“In the period ahead, spending on infrastructure, health, education and social assistance will continue to grow, while the deficit will narrow to protect long-term sustainability,” states the MTBPS.
While the current account deficit is usually financed by capital inflows, investors are slowly turning away from developing markets as the US is likely to start tapering its quantitative easing program next year.
National Treasury says its supportive macroeconomic, fiscal and monetary policies provide the economy with flexibility to adjust and to weather short-term volatility. However, the MTBPS notes that the reliance on foreign investors to finance the budget deficit has increased.
“These vulnerabilities have emerged just as space for countercyclical policy interventions has narrowed. The deteriorating current account deficit and an increasing debt-to-GDP ratio underscore the need to continue fiscal consolidation. Yet at the same time, slower domestic demand and high unemployment require government to maintain fiscal support to the economy,” states the report.
Total net foreign capital inflows decreased by 4% during the first half of this year compared to the same period last year.
Net purchases of bonds by international investors declined from R76bn over the first nine months of 2012 to R37bn over the same period in 2013. Net purchases of equities reversed, from an outflow of R5bn to an inflow of R26bn.
“Weaker inflows reflect a pullback from emerging markets and concerns about the domestic economy,” the MTBPS states.