Instant View: South Africa budget flags COVID support, spending restraint

LONDON (Reuters) - South Africa’s Treasury presented its 2021 budget to parliament on Wednesday.
Below are some reactions from economists and analysts on the announcement.
SERGI LANAU, DEPUTY CHIEF ECONOMIST INSTITUTE OF INTERNATIONAL FINANCE
“Is South Africa’s budget proposing big cuts? Fairly big by the standards of large adjustments elsewhere, which on average featured permanent cuts of 2.5% of GDP. South Africa proposes a cumulative 2.1% cut (2019-23). Not easy with a pandemic in between, but unfortunately not enough to lower debt.”
“South Africa’s budget targets a primary deficit of 0.5% in 2023, tighter than the 2019 outcome of 1.5% of GDP. The issue is that this is not the kind of deficit that stabilizes debt, given stubbornly weak growth and a steep yield curve. They eventually need a primary surplus.”
“As expected, higher-than-forecast revenues were partly used for a permanent reduction in the debt-GDP ratio and partly absorbed by expenditure increases.”
“The government was somewhat less conservative than we would have preferred amid elevated forecast and execution risk; its projections generally appear credible but the risks are biased to the downside.”
“The sizeable lowering of weekly bond auction sizes (which not only directly eases pressure on the bond market but also arguably implies that Treasury is quite confident about the feasibility of the proposed fiscal plan”.
“The key headline takeaway... was a larger than anticipated reduction in local currency bond issuance. Both the rand and SAGBs have rallied on this news, although the primary driver appears to be a shift in the government’s funding strategy, with a more sizeable drawdown of existing cash balances.”
“The actual deficit path outlined is not far from our pre-budget expectation – although the funding shift will help debt-to-GDP to peak at a lower level than previously envisaged.”
“In overall terms, the full budget package still surprises very positively.”
“The key challenges for South Africa do however persist... Weak structural growth and the Eskom debt overhang must still be addressed. For now however, expect markets to bask in a moment of unexpected positive news.”
“The deficits remain pretty large that’s worrying.”
“It’s encouraging that taxes weren’t raised ... But on the expenditure side, billions are still going to state owned entities and there was no detail about how that will be solved”
“The NT also did not provide granular detail about the public wage bill reductions, but that might be because a lot it is still up in the air. It’s a big risk to the budget deficit path going forward”.
“Kudos to the finance minister for digging in his heels; instead of buckling under constant pressure to spend more, he remains steadfast in pursuit of fiscal discipline.”
“Spending restraint remains a more effective tool than tax hikes to help achieve debt stabilization. In this respect, withdrawing last year’s proposal to raise an additional 40 billion rand over the medium term through tax measures is welcome news.”
“Staying the course with regards to wage bill restraint is commendable. Growing the bill at 2% to 3% below projected inflation will take some doing, but it’s a crucial part of what’s necessary to turn the country’s debt trajectory around.”
“Questions abound as to the ability to stabilize debt in the outer years, yet markets are likely to take cue from a better-than-expected Budget outcome and relief in bond yields is expected. This is also one of the few times that the fiscal plan remained constant between budgets. The announcement that the planned R40bn in tax measures is now scrapped is a positive for the growth outlook, as is the commitment to expenditure plans, particularly the wage freeze in the public sector.”
“Looking to H2 2021, there are many risks that come to the fore, from additional Covid-19 waves, the vaccine rollout, public sector wage negotiations and the overall GDP recovery. Until then, we see rates unchanged and the rating agencies unlikely to take any H1 action.”
“The budget has been a welcomed surprise, and a positive deviation from previous years’ negative surprises. Government expresses a strong intent in this budget to proactively keep a lid on expenditure, mainly via the compensation lines, to manage debt sustainability. In the absence of growth enhancing reforms, this will be necessary to avoid more politically opposed outcomes such as relying on IMF support.”
“At the same time, this Budget can be commended for additional concessions to households in the form of further grant support and no additional tax hikes. The wage bill is only adjusted for covid-19 specific increases, thus the outcome from upcoming 3-year wage negotiation remains an uncertainty.”