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Fitch: S Africa Maintains Fiscal Stance; Politics Still a Risk
February 23, 2017 / 12:42 PM / 9 months ago

Fitch: S Africa Maintains Fiscal Stance; Politics Still a Risk

(The following statement was released by the rating agency) HONG KONG/LONDON, February 23 (Fitch) South Africa's 2017/18 budget broadly maintains fiscal settings and macroeconomic forecasts, and clarifies revenue measures promised last year, Fitch Ratings says. It shows that deficit reduction remains an important policy aim, but we think political and social pressures will test the government's commitment to fiscal consolidation. Meanwhile, sustainable consolidation remains reliant on a still-fragile recovery of GDP growth. Wednesday's budget breaks the trend of growth forecasts being lowered in successive budgets and Medium-Term Budget Policy Statements (MTBPS) - a major reason for the substantial deterioration in fiscal indicators in recent years. It forecasts GDP growth to rise to 1.3% in 2017, 2% in 2018 and 2.2% in 2019, broadly in line with our projections. The forecasts are unchanged from October's MTBPS. Consequently, the consolidated 2017/18 budget deficit projection of 3.1% of GDP is unchanged from the MTBPS, while deficits in the following two years were raised only marginally, to 2.8% and 2.6%. The consolidated primary budget balance for 2016/17 is still expected to turn positive after persistent deficits in previous years and will rise to 1.1% of GDP in 2019/20. Forecasts for gross loan debt (essentially general government debt excluding local authorities) were lowered by 0.1 percentage points to 52.3% in 2017/18 and 52.9% in 2018/19, the peak year under current forecasts. But contingent liabilities rose substantially, as the guarantee exposure to state-owned enterprises (SOEs) increased ZAR52.5bn in 2016/17, increasing total contingent liabilities including guarantees by 1pp of GDP to 17.6%. The government expects to reverse this increase by 2019/20, but political in-fighting, which partly revolves around the control of SOEs, makes this uncertain. The slightly higher deficit forecasts for 2018/2019 and 2019/2020 reflect the fact that tax buoyancy (the ratio of tax revenue growth to nominal GDP growth) for 2016/17 was revised down to 0.88 in the budget from 1.07 in the MTBPS due to weak tax receipts. No similar adjustments were made for subsequent years. We do not incorporate similar deterioration in our fiscal forecasts, but it does create uncertainty. If tax buoyancy were over-estimated by the same amount this fiscal year, revenue would fall short of official projections by 0.4% of GDP. Positively, the budget delivers measures to raise tax revenue by ZAR28bn in 2017/18, meeting commitments made in last year's budget and the MTBPS. These include incomplete adjustment of tax brackets to inflation, a new top marginal income tax bracket of 45%, an increase in the withholding tax rate and a number of indirect tax rises. The expenditure ceilings, a core part of the fiscal framework, were raised for the first time since their introduction, but by negligible amounts. We do not believe this signals any change in the commitment to consolidation, although it highlights how tight room for cutting expenditure has become. The main challenge to fiscal consolidation comes from factional tensions in the governing African National Congress, which are diverting political energy from economic reform and may lead to policies that raise fiscal deficits or undermine the stability of SOEs. We think political risks to governance and policy-making will remain high at least until the ANC's electoral conference in December. This is reflected in the Negative Outlook on South Africa's 'BBB-' sovereign rating. <a href="">2017 Outlook: Sub-Saharan Africa Sovereigns Contact: Jan Friederich Senior Director Sovereigns +852 2263 9910 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Mark Brown Senior Analyst Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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