South Africa is expected to record its worst economic performance in recent history as a direct result of the Covid-19 outbreak and subsequent lockdown measures. In response to this, SA’s Government has introduced a three-phase economic response to the virus outbreak. This has necessitated the release of a Supplementary Budget Review (SBR). This emergency budget deals mainly with the second phase of the government’s economic response that saw the introduction of a R500 billion fiscal stimulus package on 21 April to support both the household as well as the business sector.
Expenditure and Revenue Adjustments
Yesterday’s SBR stated “Given the extent of fiscal consolidation now required, both expenditure reductions and tax increases are necessary to stabilise debt.”
- National Treasury expects expenditure to increase to R1.573 trillion from R1.537 trillion projected in the February 2020 budget. While the rise in total expenditure only reflects an increase of R36 billion, the total fiscal response to the pandemic resulted in R145 billion additional spending. National Treasury was able to reprioritise R109 billion, but the remaining R36 billion will be financed through an increase in the main budget deficit.
- In terms of tax revenue, National Treasury has projected that government will only collect R1.12 trillion in 2020. This is a massive R304.1 billion below the budgeted tax revenue presented in February’s budget. Treasury is therefore set to announce tax increases in the 2021 Budget.
- As a result, National Treasury’s projected main budget deficit has increased to -14.6% of GDP in 2020/21, from an initial estimate of -6.8% of GDP. As such, the increased borrowing requirement is expected to push up government debt from 63.5% of GDP in 2019/20 to 81.8% of GDP in 2020/21.
- National Treasury also presented two debt scenarios, an active and passive scenario (see below chart), with the passive scenario most likely leading to debt default and IMF rescue.
Other Budget Highlights
- National Treasury has reduced its actual nominal GDP forecasts. A -7.2% fall in GDP is now estimated for this year, versus growth of 0.9% y/y it previously projected for 2020.
- In terms of inflation, the 2020 Supplementary Budget shows that prices are expected to moderate significantly in 2020, falling to 3.0% from 4.1% in 2019, before increasing to 4.5% by 2023, more or less in line with estimates by the SARB.
The SBR budget seems more SA bond-friendly than equity-friendly. SA bond yields declined shortly after the speech as National Treasury pledged to look to alternative methods of funding to plug the budget deficit.
Lower consumption expenditure by government and the hinting of potential tax increases to come will be negative for the equity market in the short to medium term. A commitment to structural reform and an ambitious infrastructure programme could however boost growth longer term.
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