Executive Summary

  • The GDP growth profile at the 2017 MTBPS was lowered sharply in the outer years, significantly worse than even our most bearish estimate. Real GDP growth is now expected at 0.9%, 1.1%, 1.6% and 2% over the next four fiscal years from 2017/18 (vs 1.3%, 2.1% and 2.3% forecast in February 2017). Similar adjustments to calendar year growth estimates reflect a constrained growth environment, which is fuelled by the confidence recession and investment recession that we currently find ourselves in.
  • Compared to the 2017 Budget, nominal GDP growth forecasts have been revised down by about 1.5% per year between 2017/18 and 2019/20. Forecasts for nominal growth in gross tax revenue have been revised down by an annual average of 2.2% over the same period.
  • The MTBPS shows a revenue shortfall of R50.8 billion in 2017/18, relative to February 2017 estimates. This will be the largest under-collection since the 2009 recession. This is very much close to the most bearish of consensus estimates on the revenue front. However, what is more worrying to us is the fact that revenue projections out to 2019/20 have been lowered by a cumulative R209.5 billion.
  • Expenditure will overshoot budget by around 0.2% or R3.5 billion this fiscal year and is then budgeted to grow mildly above inflation over the remaining period. This stands in stark contrast to a history of undershooting on expenditure targets, and is also in contrast to our own expectation of the same in the current year.
  • Minister Gigaba stressed that the government remains committed to operating within the expenditure ceiling over the medium-term. However, given the significant underperformance of revenues over the period, we remain wary as to whether the hard ceiling will be maintained.
  • As a result of the above developments, the consolidated budget deficit will widen to 4.3% of GDP in 2017/18, against a 2017 Budget target of 3.1% of GDP. The main budget deficit, which determines government’s net borrowing requirement, will be 4.7% of GDP this year, significantly wider than our most bearish estimate of 4.3%.
  • Borrowing will need to be R52.8 billion higher than projected in the current year, mainly as a result of revenue shortfalls. The primary balance – the difference between revenue and non-interest spending – had been projected to continue narrowing. However, revenue shortfalls now result in the primary deficit stabilising at 0.7% of GDP.
  • Gross loan debt is expected to increase from R2.5 trillion or 54.2 per cent of GDP in 2017/18 to R3.4 trillion or 59.7 per cent of GDP in 2020/21. Absent higher economic growth or additional steps to narrow the budget deficit, the debt-to-GDP ratio is unlikely to stabilise over the medium-term.
  • Overall, a downgrade and exclusion from the WGBI seems as though it is a foregone conclusion in the market. Given an extremely bearish MTBPS report, we believe the risks of credit ratings downgrades before year-end have risen materially. Should ratings agencies wait to assess the February 2018 budget instead, we still believe downgrades are highly likely by June 2018.