BER ASSAF WEBINAR

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BER ASSAF WEBINAR

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DECELERATION AND DECOUPLING

• SA was already underperforming its EM peers before the current crisis, and more so in recent years.

• This illustrates long-run structural weaknesses, rather than the need for

cyclically-driven demand stimulus

₃

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SA VS OTHER EMERGING MARKET – PROBABLY OF DEFAULT

• The CDS spreads are an indicator of the market perception of South Africa’s risk of defaulting on its debt

• Sovereign spreads have sustainably decoupled from other EMs since around 2012.

• This means that investors are increasingly differentiating between

markets, including in the context of stronger global liquidity

¹⁰

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HAS THE CREDIT RISK PROFILE CHANGED?

588

1249

168

497

0 200 400 600 800 1000 1200 1400

18/06/01 18/09/01 18/12/01 19/03/01 19/06/01 19/09/01 19/12/01 20/03/01

Basis points

Argentina South Africa EM average

Argentina enters debt restructuring in early Sept 2019 to avoid 9th End Aug 2019:

Pres. Macri loses election

to Pres.

Fernández

Fernández pursues anti-

austerity measures

112% incr in 3mo

196 bps increase in 1.5 months Pres. Fernández froze utility tariffs, reduced medicine prices, increased

wages, gave tax rebates to vulnerable households, and funded these with tax increase

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Outline of in-year spending

5

Administrative Service 65 649

7%

Social Services - Education and Related

depts 132 130

14%

Social Services - Health and

Social 254 013 Protection 26%

Services 203 265 21%

Economic Services

88 381 9%

Urban Development

and Infrastructure

219 716 23%

BASELINE ALLOCATION (NATIONAL)

_allocation^Baseline

Discretionary Govt Spending

Goods & Services 77 891

Public Entity Transfers 141 013

Other transfers (eg. SDA, TVET Colleges) 85 410

Buildings and other fixed structures 10 681

Machinery and equipment 4 262

Provincial Conditional grants 110 785

Local government conditional grants 43 819

Non-discretionary Spending

Debt service cost 229 430

Compensation of employees 177 034

Provincial and local equitable shares 603 801

Transfers to households incl. social grants 201 476 Payments for financial assets incl. SOE contributions 72 054

Other 3 337

1 760 994

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AUSTERITY???

• Primary fiscal deficit since 2009 until 2024

• Higher Govt spending growth than Economic growth

• "The Tyranny of Incrementalism”

• What happens to the money already in the baseline (R2 trillion)

• AG report identifies R4billion in financial loss in national and provinces, and most of this waste is in the social services.

• Poor state management capacity, especially in SOCs has correlated with an immense increase of fiscal risks

• Contingent liabilities are projected to rise to R1 trillion or

20% of GDP in 2024

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SOUTH AFRICA IN GLOBAL CONTEXT

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South Africa in global context

§ In comparison with a wide range of other developing countries, South Africa’s average primary balance over the last 10 years falls in the middle of the distribution.

§ But South Africa’s three-year increase in debt to GDP is the among the largest.

§ Fiscal distress is mounting in developing countries amid historically high indebtedness. In this environment of rising fiscal pressures, South Africa is losing ground to its peers.

-4 -3 -2 -1 0 1 2

Egypt India Morocco Pakistan Malaysia China South Africa Poland Chile Sri Lanka Croatia Ukraine Dominican Rep. Turkey Colombia Belarus Brazil Thailand Peru Hungary Uruguay Philippines

Per cent of GDP

Average primary balance, 2009 – 2019 Projected three-year increase in debt

-5 0 5 10 15 20 25

South AfricaPhilippinesColombiaThailandPolandTurkeyChinaBrazilIndiaChile Dominican RepublicSri LankaMoroccoMalaysiaHungaryUruguayPakistanUkraineBelarusCroatiaEgyptPeru

Per cent of GDP

Source: IMF Fiscal Monitor, October 2020

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THE DEFICIT HAS BECOME STRUCTURAL

8

Main budget revenue and expenditure* Gross debt-to-GDP outlook

22 24 26 28 30 32

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24

Per cent of GDP

Main budget revenue

Main budget non-interest expenditure

*Excludes Eskom financial support and transactions in financial assets and liabilities

53

80.3 81.9 85.1

87.3 88.5 88.9 88.3

87.4 86.0

56.6 63.3

81.8 85.6

90.1

92.9 94.6 95.3 95.1 94.5

93.3

50 55 60 65 70 75 80 85 90 95 100

2017/18 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 2026/27 2027/28 2028/29

Per cent of GDP

Revised 2020 MTBPS

• The main budget primary deficit is projected to narrow over the medium term and gross

debt-to-GDP is now projected to stabilise at 88.9 per cent of GDP in 2025/26.

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A FISCAL CRISIS CAN HAVE LONG RUN &

PROFOUND IMPLICATIONS

• Failure to arrest the debt trajectory will see debt service costs consume around 27% of tax revenue by 2024/25

• The stock of debt crosses the 100% mark in 2023/24, reaching 140% in 2028/29

• Deficits remain elevated at around 12% of GDP for a long-time, severely constraining domestic saving and investment

• A fiscal crisis could deduct more than R2 trillion from nominal GDP over the next decade

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

40,0%

45,0%

0,0%

20,0%

40,0%

60,0%

80,0%

100,0%

120,0%

140,0%

160,0%

2020/212021/222022/232023/242024/252025/262026/272027/282028/29

Debt dynamics

Debt (% of GDP) Debt Service Costs (% of revenue)

-400 000 -350 000 -300 000 -250 000 -200 000 -150 000 -100 000 -50 000 0

2020/21 2021/22

2022/23 2023/24

2024/25 2025/26

2026/27 2027/28

2028/29

Loss of GDP

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SOUTH AFRICA IS NOT A LOW TAX COUNTRY

10 Tax-to-GDP actually stayed

flat over the two years with

large increases in tax rates

(2016/17 and 2017/18)

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THANK YOU

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Academy of Science of South Africa (ASSAf)

ASSAf Research Repository http://research.assaf.org.za/

B. Academy of Science of South Africa (ASSAf) Events I. Other

2021

Webinar Two of a Three-part Series:

How to Fund Interventions to Reduce Poverty in South Africa?

Academy of Science of South Africa (ASSAf)

Cite: Academy of Science of South Africa (ASSAf) (2021) 'Webinar Two of a Three-part

Series: How to Fund Interventions to Reduce Poverty in South Africa?’ url: http://hdl.handle.net/20.500.11911/188 http://hdl.handle.net/20.500.11911/188

Downloaded from ASSAf Research Repository, Academy of Science of South Africa (ASSAf)