Executive Summary

  • We are currently in a low-growth trap and this will likely weigh significantly on the revenue outlook over the medium-term. Unless confidence levels are boosted, SA is likely to achieve fractional or low single-digit growth rates over the next three to five years. We anticipate a 50bps miss in the 2017/18 growth forecast, which may result in a lower-than-projected 6.3% nominal GDP growth rate and a R44 billion revenue shortfall (which would likely emanate from the PIT and VAT categories). The V-shaped recovery in revenue growth projections by National Treasury (NT) is unlikely to materialise given lower gross earnings, higher unemployment, subdued growth, subdued corporate profits, and a still fragile household sector.
  • Total FYTD expenditures have surged by 8.4% yoy. July expenditures were up almost 14% yoy and 34% mom. This means that revenue collection is slipping further away from the 2016/17 run rate of 28.7% (currently 26.9%), while expenditures have now overtaken the prior year’s run rate of 32.8% (currently 32.9%).
  • We believe that the Minister of Finance, Malusi Gigaba, is tasked with the most difficult budget of recent times – with the expenditure ceiling needing to be calibrated on a lower potential growth rate, it could mean the end of Treasury’s commitment to fiscal consolidation which would likely yield a downgrade (and a shock to already-low confidence levels).
  • The government’s financing strategy is focused on mitigating the risks arising from an increase in redemptions over the medium-term. For this reason, NT has engaged in switch auctions. However, curve steepening has made this more expensive. NT is paying at least 55bps more for its issuance of long-dated bonds compared to eight months ago.
  • NT is rolling over its near-term maturity risk out to between 2026 and 2048 by engaging in switch auctions which will result in a sharp increase in debt service costs in the outer years. Oddly enough, this stands in stark contrast to what Pravin Gordhan indicated in February 2017, “By acting now to stabilise debt, government is ensuring that future generations will not be paying taxes for today’s expenses 20 or 30 years from now.” The increase in debt stock, the issuance of longer-dated bonds that attract higher interest payments, and the exchange of short- for longer-dated instruments, should put further upward pressure on debt-service costs.
  • We believe Minister Gigaba and the Treasury team will be walking a tightrope in trying to maintain its promises of narrowing the deficit such that a primary budget surplus is achieved in 2018/19. We think that the pressure of ensuring limited fiscal slippage is greater than the pressure of ensuring fiscal consolidation at this stage. This is due to there being a greater likelihood of a further deterioration (wider deficit) than an improvement in the fiscal metrics in the current environment in our opinion.
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