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Gross Domestic Product (GDP) outlook
Economic growth for 2018 has been revised lower, from 1.5% to 0.7%. The downward revision finds place as the first two quarters of the year have seen an economic contraction and the state of global trade remains uncertain. Growth is however expected to recover to 2.3% by 2021.
Revenue collections are expected to fall short of the previous estimates noted in Februaries budget. For the 2018/2019 fiscal year, the collections are expected to be around R27.4bn less than what was guided at the previous meeting. Reasons for this include, upward revisions to estimates on Vat refunds, a shortfall in corporate and personal income tax, as well as a once off payment to reduce the Vat refund backlog.
Mr Mboweni has guided that the expenditure ceiling would be maintained.
Some of the upward adjustments to expenditure include:
-Budget facility for infrastructure projects
- Schools infrastructure backlogs grant
- Drought Relief
- Financial Support to State-Owned Enterprises (SOEs)
Some of the downward adjustments to expenditure include:
- Declared unspent funds
- Contingency reserve
- National government project underspending
- Local government repayment to National Revenue Fund
The budget continues to prioritise social spending including education, health, the provision of water and electricity services, and social grants as these commitments support economic and social development and ensure sustainable support to millions of South Africans who live in poverty.
Debt servicing costs are the fastest growing area of spending, followed by learning and culture as well as health.
The debt outlook
Upward revisions to gross loan debt, the wider deficit and weaker exchange rate have seen expectations for debt as a percentage of GDP rise. Debt as a percentage of GDP is expected to be realized at 55.8% in 2018/19, rising to 59.6% by 2023/24 before stabilizing.
The rand weakened into the MTBS, underperforming its emerging market currency peers, suggesting that there may be an increased possibility of a ratings downgrade to come from Moody’s Investor Relations (The last of the major rating’s agencies to have South Africa’s local currency debt at investment grade). Moody’s had said it would await the budget speech before reviewing South Africa’s sovereign credit rating. While the agency may be concerned with the downward revision on revenue collection and upward revision on the debt outlook, guidance that the expenditure ceiling would be maintained and that efforts were being made to stabilize ailing SOEs might have appeased the company (for now).
With this in mind, we think that South Africa may be able to preserve its current investment rating with Moody’s, although consider a slightly elevated risk of a ratings downgrade.