Budget 2021

Recovery hopes lie in vaccine rollout and reforms, Mboweni says

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Finance minister Tito Mboweni at the press conference before he delivered his 2019 budget speech  (Gallo Images, Brenton Geach)
Finance minister Tito Mboweni at the press conference before he delivered his 2019 budget speech (Gallo Images, Brenton Geach)
  • Finance Minister Mboweni has said gross national debt is projected to rise from 80.3% of GDP in the 2020/21 financial year.
  • The minister said debt-service costs are expected to reach R338.6 billion in that year.
  • The Budget Review said consolidated deficit is projected to narrow from 14% of GDP in 2020/21 to 6.3% of GDP by 2023/24.

Finance Minister Tito Mboweni on Wednesday said South Africa's most urgent challenge is to balance the immediate need for support to the economy during the Covid-19 pandemic with ongoing efforts to close the budget deficit, which predates the pandemic.

However, he said, this cannot be conceived without taking into consideration the urgent reforms government needs to implement to prepare the economy for a recovery, as well as a successful immediate vaccination rollout.

The Budget Review said total consolidated spending is expected to amount to R6.16 trillion over the next three years or R2 trillion each year over the medium term, with the majority of the spending going towards social services.

Gross national debt is projected to rise from 80.3% of GDP in the 2020/21 financial year to 87.3% of GDP by the 2023/24 financial year, with debt-service costs expected to reach R338.6 billion in that year. Real GDP is expected to grow at 3.3% in 2021 and 2.2% in 2022, according to the Budget Review.

The 2021 Budget Review said the consolidated deficit is projected to narrow from 14% of GDP in 2020/21 to 6.3% of GDP by 2023-24 financial year. The Budget Review also expects gross debt-to-GDP to stabilise at 88.9% of GDP in the 2025/26 financial year.

During his speech, Mboweni said the 2021 budget framework puts South Africa on course for a primary surplus stabilising government at 88.9% of GDP in 2025/26. However, he said the path to this goal will not be easy.

The Budget Review said government borrows most of the financing it needs by issuing bonds sold to foreign investors, banks, insurers, and pension funds.

"Foreign investors, the largest holders of government bonds, have lowered their relative share of South African sovereign debt following the onset of Covid-19 and the March 2020 credit rating downgrades that led to South Africa's exit from the World Government Bond Index," the review said.

It said domestic banks in turn have increased their share of government bond holdings from 16.8% in January 2020 to 22% in December 2020.

"Any deterioration in the quality of this government debt would expose the banking sector to systemic risks. The fiscal consolidation measures and debt strategy proposed in the 2021 Budget will work to contain any such risks," the Budget Review said.

The Budget Review said debt-service costs were higher than the 2020 Budget estimates by R3.6 billion in the 2020/21 financial year, R11.3 billion in the 2021/22 financial year and R17.9 billion in the 2022/23 financial year.

"Due to the higher budget deficit, coupled with fluctuations in interest, inflation and exchange rates, debt-service costs will continue to rise over the medium term," the Budget Review said.

It said gross national debt was projected to grow continuously over the long term, despite 2020 budget proposals to reduce expenditure growth. The review said strategies to contain debt would be monitored regularly by the minister.

"We recommend that the minister of finance reports quarterly on the effectiveness of the National Treasury's debt-management strategies that [will] ensure that the level of debt stabilises over the medium term and avoids a sovereign debt crisis," the review said.

Two scenarios

The Budget Review outlined two possible scenarios for South Africa's outlook where it relates to debt in the financial year.

One scenario outlines rapid increases in electricity supply and faster reform implementation boosting growth, complemented by essential economic reforms.

"Rapid regulatory adjustments, including raising licensing thresholds, could ease the impact of load shedding on firms and households.

"Implementation of economic reforms improves confidence and the sovereign risk premium, lowering overall borrowing costs. Private sector investment and consumption [will] increase, reflecting more durable and sustained growth levels. Real GDP growth reaches 3.6% in 2021," the review said.

The second scenario reflects the effects of two more waves of Covid-19 infections, assuming the vaccine rollout has a limited effect on stemming the spread of infections, requiring strict lockdown measures that depress economic activity.

"In this scenario, vaccine rollout only gains traction in 2022. Economic recovery is delayed and the momentum from late 2020 is reversed, leading to long-lasting effects, and further reducing growth potential. The hospitality and tourism, entertainment, trade, services, and transport sectors are particularly negatively affected," said the review.

The Budget Review said in this scenario, the economy grows by only 1.6% in 2021, with a base effect into 2022 and production levels would remain lower than currently forecast over the long run.

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