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The SA Daily 19 February 2018

Fiscal consolidation key to SA's ratings

Elna Moolman

  • This week, we await the 2018 Budget. As per the 2017 MTBPS, tax revenues for 2018/19 are expected to underperform by R69.3bn, (mainly due to weak growth), from the 2017 Budget estimate. Since then, the Finance Minister has indicated that expenditure cuts of R25bn and revenue measures to the value of R15bn would stabilise the debt-to-GDP below 60% over the medium term.
  • In this context, a further R30bn is required to plug the shortfall (including R15bn previously announced and the aforementioned R15bn). We tentatively assume that government will increase revenue through a combination of asset sales and tax hikes. But, given the fragile economic recovery underway and the disappointing revenue performance after the significant tax hikes in 2017, Treasury must proceed cautiously.
  • A key risk to fiscal consolidation will be ‘free higher education’ as currently proposed (through grants). Reports suggest that this would cost around R12-R15bn in the first year. Without an increase in growth, this could threaten SA’s debt-to-GDP ratio. From a sovereign credit ratings perspective, it is SA growth, more than the fiscal metrics, that underperforms relative to countries with similar credit ratings. Therefore, we believe that a rating agency would look favourably on income-contingent loans rather than grants.

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