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Macro Focus: South Africa’s fiscal litmus test

The macro outlook for South Africa does not look rosy. The country’s primary deficit soared to 10% of GDP in 2020 and it is expected to remain at high levels in the coming years, as the pandemic-related fiscal measures induced a strong “ratchet effect” on public expenditure.  As mentioned in the Medium Term Budget Policy Statement issued by the Ministry of Finance in October 2020, “Options to stabilise the fiscus are becoming increasingly limited. Growth reforms are only expected to begin yielding results over the next several years, implying continued weakness in revenue collection over the period ahead. “ Public debt grew from 60% of GDP in 2019 to over 80% of GDP by the end of 2020.

The macro outlook for South Africa does not look rosy. The country’s primary deficit soared to 10% of GDP in 2020 and it is expected to remain at high levels in the coming years, as the pandemic-related fiscal measures induced a strong "ratchet effect" on public expenditure.  As mentioned in the Medium Term Budget Policy Statement issued by the Ministry of Finance in October 2020, “Options to stabilise the fiscus are becoming increasingly limited. Growth reforms are only expected to begin yielding results over the next several years, implying continued weakness in revenue collection over the period ahead. “ Public debt grew from 60% of GDP in 2019 to over 80% of GDP by the end of 2020. Government bond yields jumped sharply in March  2020 when the three rating agencies downgraded the country’s long term sovereign rating to junk.“Interest payments absorbing a growing share of limited public resources, which increasingly crowds out spending on social and economic investment. Debt‐service costs are now 4.8 per cent of GDP, up from 3.3 per cent in 2016/17. “ (MBTPS).

Among the three major rating agencies, Moody’s was the latest so far to downgrade the country’s LT sovereign rating from Ba1 to Ba2 on November 20, 2020. According to Moody’s, “The key driver behind the rating downgrade to Ba2 is the further expected weakening in South Africa's fiscal strength over the medium term.” Moody’s points out to South Africa’s idiosyncratic constraints as an additional negative factor “While South Africa is not alone in having been severely affected by the crisis, its capacity to mitigate the shock over the medium term is lower than that of many sovereigns given significant fiscal, economic and social constraints and rising borrowing costs. 


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