By Vuyani Ndaba
JOHANNESBURG, Oct 27 (Reuters) – South Africa is expected to widen its budget deficit assumptions for coming years due to poor tax receipts, a prospect likely to keep its bond investors on edge as more details emerge on debt sustainability, a Reuters poll found on Friday.
The South African government is already paying one of the highest premiums in global bond markets due to increasingly fussy investors, as has also been demonstrated by soaring U.S. borrowing costs, adding to woes at the National Treasury.
Still, the consolidated budget deficit is likely to widen to 5.1% of gross domestic product (GDP) for the current fiscal year that began in March, according to the median in a poll of 13 economists taken in the past week.
However, a further slippage to 5.2% of GDP in the following year is expected before narrowing to 4.9% in 2025/26.
Michael Kafe at Barclays wrote in a note: “The writing was always on the wall” that the country’s deficit would be widened.
“We expressed our scepticism about South Africa’s ability to attain its fiscal targets when the 2023 budget was presented in February,” he wrote.
Since then, incoming data have painted a progressively worse outcome, as corporate tax revenues undershot, while virtually all major expenditure items have run well above their usual rates.
Last month the National Treasury sounded a warning shot in a letter sent to all government departments, outlining the fiscal challenges facing the state and suggesting widespread cost-cutting measures.
In February the government had predicted the budget deficit would narrow to 4.0% of GDP this fiscal year from 4.2% in the previous year.
Back then the National Treasury also assumed its budget would consolidate at a deficit of 3.2% of GDP in 2025/26.
Economists estimate a consolidated budget revenue shortfall for this fiscal year of between 30 billion rand ($1.6 billion)and 65 billion.
The survey suggested the actual gross debt-to-GDP ratio accumulated by South Africa will be 73.2% of GDP this fiscal year before eventually reaching 75.85% in the fiscal year 2026/27.
Annabel Bishop, chief economist at Investec Securities, said the sustainable level of debt for emerging markets is around 60% of GDP.
Bishop said rating agencies continue to worry about the pressure placed on finances from funding state-owned enterprises, with freight logistics firm Transnet and power utility Eskom particularly underperforming.
“We believe the Treasury’s funding strategy will be a key focus, and as a corollary, a key driver of the market reaction when the Treasury presents the Medium Term Budget on November 1,” Kafe added in the note.
Global bond investors will watch how the government plans to plug the hole of revenue shortfalls and narrow deficits in the forecast horizon, with a combination of options including spending less, borrowing more or increasing taxes.
Jeffrey Schultz, chief economist at BNP Paribas for the CEEMEA region, wrote that increased bond issuance looks likely this quarter.
Schultz added that holdings of South African government bonds by major investors continue to fall as a share of portfolios, given questions over debt sustainability, while local banks – previously larger supporters of the bonds during COVID-19 – have slowed purchases and are hesitant to invest in already “overweight” positions.
($1 = 18.9621 rand)
Reuters Poll: South African October budget outlook https://tmsnrt.rs/46K5pBz
(Reporting by Vuyani Ndaba; Editing by David Holmes)
((firstname.lastname@example.org; +27 11 775 3157;))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.