The International Monetary Fund (IMF) has warned that South Africa’s fiscal metrics could deteriorate further in the medium term than initially forecast amid high inflation, rising borrowing costs, a weaker growth outlook and elevated financial risks.
In its Fiscal Monitor report yesterday, the IMF said South Africa’s government debt in relation to gross domestic product (GDP) could increase while the budget deficit could widen more than expected in the three years to 2026.
The report, which proposes a “Path to Policy Normalisation”, discusses how exceptional economic conditions since the pandemic have shaped fiscal outcomes.
It calls for consistent policies to bring inflation back to target, address public finance risks while protecting the most vulnerable and safeguard financial stability.
In the report, the IMF has projected the South African government’s debt-to-GDP ratio to increase from 72.3% in 2023 to a record 80.0% in 2026, the highest it has ever been since democracy.
This goes against Finance Minister Enoch Godongwana’s statement in his February Budget speech that the government debt would stabilise at a higher level of 73.6% of GDP and in 2025/26 mainly due to this Eskom debt relief.
The lender of last resort also said South Africa’s consolidated fiscal deficit would rise from 5.9% in 2023 to 6.3% in 2026.
In February, Godongwana said the fiscal deficit was projected at 4.2% of GDP for 2022/23, and will ease to 3.2% in 2025/26.
IMF division chief for fiscal affairs department Paulo Medas said that tighter budgetary constraints have exacerbated an already difficult balancing act for low-income countries.
Medas said countries have also been hit hard by the cost-of-living crisis and food insecurity, stalling global poverty reduction.
“The near-term outlook is complex. Amid high inflation, tightening financing conditions, and elevated debt, policymakers should prioritise keeping fiscal policy consistent with central bank policies to promote price and financial stability,” Medas said.
“Many countries will need a tight fiscal stance to support the ongoing disinflation process — especially if high inflation proves more persistent.
“Tighter fiscal policy would allow central banks to increase interest rates by less than they otherwise would, which would help contain borrowing costs for governments and keep financial vulnerabilities in check.”
In South Africa, the Reserve Bank surprised the financial markets and raised the benchmark interest rate by 50 basis points to 7.75% from 7.25% last month as inflation remained stubbornly above the 3-6% target range.
This marked the ninth hike since November 2021 and a cumulative adjustment of 425 basis points since the start of the rate cycle.
Medas said one of the ways that the governments could reduce their fiscal deficits was to scale down on widespread subsidies that were implemented to mitigate the rise in energy prices.
“Tighter fiscal policies require better targeted safety nets to protect the most vulnerable households, including addressing food insecurity, while containing overall spending growth, as governments are likely to confront social pressures to compensate for past increases in the cost of living,” he said.
“Risks are high, however, and policymakers will need to be ready to respond quickly. If financial turbulence morphs into a systemic crisis, fiscal policy may need to intervene swiftly to facilitate resolution.
“More generally, concerns with debt vulnerabilities have intensified in many countries. In low-income developing economies, higher borrowing costs are also weighing on public finances, with 39 countries already in or near debt distress.”
This comes as the IMF on Tuesday maintained a near zero economic growth for South Africa due to crippling power cuts, weak commodity prices, and the fallout from the war in Ukraine.
The IMF’s growth forecast for South Africa remained unchanged at 0.1% for 2023, from 1.2% projected in October 2022, and is projected to rebound to 1.8% in 2024.
The IMF World Economic Outlook was also broadly unchanged at 2.8% in 2023 from 3.4% in 2022.
Oxford Economics chief global economist Innes McFee said the IMF’s forecast still looked too optimistic over the next two years.
McFee said the impact of bank funding turmoil looked to have been offset in their forecasts by the positive developments in European energy markets, solid economic momentum and China’s earlier than expected reopening, to leave the IMF’s global GDP projection broadly unchanged.
“But we think their forecasts underestimate the impact that tightening in financial conditions will have on advanced economies in the second half of this year and next. Our latest global forecast is more downbeat this year and next.
“With the fallout from bank funding turmoil still to be fully realised, we maintain the view that there are substantial downside risks to our forecast. The IMF appears to agree, assigning a 25% probability that global growth will fall below 2% in 2023.”
BUSINESS REPORT