The Presidential Fiscal Committee (PFC) and Cabinet will meet in the next two weeks to work out plan that could cut spending or tax increases of R40bn to strengthen the fiscus.
That is according to National Treasury, which was responding to the announcement on Friday that S&P Global Ratings had cut South Africa’s local-currency debt score to junk, while Moody’s Investors Services threatened to slash its ranking to the same level, raising the risk of a selloff from global indexes.
“In the 2017 Medium Term Budget Policy Statement chapter on fiscal policy, we indicated that additional spending cuts or tax increases of R40bn (0.8% of GDP), would be required from 2018/19, in order to stabilise public debt below 60% of GDP over the next decade,” Treasury said in a statement.
“Over the next two weeks, the PFC and Cabinet will consider a package of measures to this effect, to be implemented from 2018. Specific details on these measures will be announced in the 2018 Budget.”
It said that restoring business and consumer confidence and catalysing inclusive growth is the top priority of government.
“There can therefore be no doubt of government’s strong commitment to addressing the structural constraints to growing the economy and improving public finances.
“To this end, government is working urgently and diligently on practical steps to provide the necessary policy certainty, environment conducive to investment, and predictability that the country so desperately needs.
“Decisive actions in managing government expenditure and closing the revenue gap are critical for achieving sound public finances.”
Should Moody’s also downgrade the local-currency rating, rand debt would fall out of gauges including Citigroup’s World Government Bond Index, and this could spark outflows of as much as R100bn, Citigroup economist Gina Schoeman said ahead of the rating company announcements.
A selloff of rand bonds – which comprise about 90% of South Africa’s outstanding liabilities – would raise borrowing costs for the nation as it sells more debt to plug a widening budget gap.
Sachs resignation sent message of instability to ratings agencies
Business Leadership SA said on Saturday that the resignation of Treasury budget chief Michael Sachs “sent a message of instability and lack of clarity to the ratings agencies”.
He reportedly resigned due to issues stemming from the new PFC, which has been critcised of limiting the scope of transparency on the budgeting process. However, Treasury defended the PFC on Saturday.
“National Treasury remains the centre where budgeting occurs as provided for in the Constitution. It is also important to clarify that the Mandate Paper developed by the Department of Performance, Monitoring and Evaluation serves to set priorities for the whole of government, ensuring alignment with the National Development Plan,” it said.
“The PFC streamlines decision-making, and provides the necessary authority to co- ordinate and ensure adherence to the fiscal framework by the entirety of government, driven at the Cabinet level. This in no way undermines the role of National Treasury in the budget-setting process,” it said.