Press Office Feature : Overview - 2016 National Budget
First National Bank
25 Feb 2016
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We are probably too late to implement and display evidence of growthYesterday’s Budget Review contained ambitious fiscal consolidation targets. Its tone also suggested a strong commitment to growth enhancing structural
While it is a step in the right direction and has probably bought South Africa some time, the odds of a downgrade by at least one rating agency in December 2016 remain high.
Changes to macroeconomic outlook
As expected Treasury revised down its expectations for economic growth and revised up its inflation forecasts for the next three years relative to what was projected in October’s Medium Term Budget Policy Statement (MTBPS).
Economic growth is now expected to average a more realistic 0.9% in 2016 (MTBPS 1.7%), 1.7% in 2017 (MTBPS 2.6%) and 2.4% in 2018 (MTBPS 2.8%). Treasury remains relatively optimistic about the economic outlook compared to our expectations.
Consumer inflation is expected to be above 6% over the next two years.
Impact on ratings
Yesterday’s outcome is likely to have shifted a downgrade to sub-investment grade by at least one agency to December from June.
While the proposed fiscal consolidation targets are ambitious, today’s effort was not sufficient to support a conclusion that a downgrade in December is unlikely.
The main reason is that while we are showing renewed commitment, we are probably too late to implement and display evidence of growth enhancing structural reforms in time to save an investment grade rating from all three major agencies.
However, based on today’s evidence we have taken a step in the right direction. That at least prevents further downside, think Brazil!
Is this achievable?
There are several risks that could impede the more aggressive fiscal consolidation path and prevent the stabilisation of government debt at a level below 50% of GDP.
First, growth is likely to be weaker than the Treasury’s forecasts leading to lower than expected tax revenue collection.
Second, distressed state-owned entities may need to utilise state guarantees in order to stay solvent in the short-term and to enable them to execute turnaround plans.
Third, while the Treasury has either met or outperformed previous expenditure ceilings, the proposed further reduction in the ceiling targets the wage bill which government has previously failed to contain within set boundaries.
Finally, while the tone of the Budget Speech and Review suggested a commitment to pursuing supply side reforms aimed at improving business confidence and aiding growth, we have heard this before.
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