SA: Fitch Highlights Concerns Over South Africa’s Fiscal Outlook Due to Wage Costs

Fitch Ratings has expressed alignment with the South African government’s projection of government debt/GDP reaching 77.7% in the fiscal year ending March 2026. However, the global rating firm raises concerns about the significant risk associated with the government meeting its ambitious fiscal targets, especially with the anticipated challenges in controlling wage costs.

The medium-term budget policy statement (MTBPS) unveiled an increased fiscal deficit projection for FY24 to 4.9% of GDP, up from 4% in the 2023 Budget. This adjustment is attributed to revenue collection challenges stemming from issues in power generation and freight rail, impacting economic activity.

Fitch remains cautiously optimistic about the government’s target of achieving a primary budget surplus this year but emphasizes the potential shortfall risk in the weak economic environment. The MTBPS aligns with Fitch’s medium-term forecasts, projecting revenue stabilizing at around 27% of GDP, though uncertainties persist given economic conditions.

The MTBPS revision elevates the medium-term projection for government debt/GDP, bringing it closer to Fitch’s September forecast of 78.5% in FY26. Both figures surpass the 76.9% assumed in July, reflecting the government’s initial forecast of 73.6% in the 2023 Budget.

Fitch questions the MTBPS assumptions on public-sector wage growth, deeming them possibly optimistic. The government anticipates a 5.1% wage bill increase for FY24 and 2.2% for FY25, which Fitch sees as potentially challenging amid socio-political risks, union resistance, and the upcoming general election.

The government’s downward revision of non-interest expenditure, including departmental rationalization, seeks ZAR37.3 billion (0.5% of GDP) reduction in FY25 and ZAR47.7 billion (0.6% of GDP) in FY26. However, detailed plans for this rationalization remain undisclosed.

Fitch anticipates forthcoming tax measures in the 2024 budget but notes the political challenges of implementing substantial changes pre-election. Additionally, there’s a risk of contingent liabilities tied to distressed state-owned enterprises impacting the government’s balance sheet.

Despite South Africa’s credit profile being supported by a favorable debt structure and credible monetary policy, Fitch emphasizes the need for substantial growth acceleration to resolve fiscal challenges. However, Fitch projects only a minor GDP growth strengthening, presenting fiscal consolidation challenges.