POLL-SA’s Q3 rebound not enough to trim budget deficits

South Africa’s consolidated fiscal deficit is set to widen further than projected in June’s emergency Covid-19 budget as a third-quarter rebound in economic growth will not boost tax receipts enough, a Reuters poll found on Wednesday.

A median of 21 economists, polled October 15-20, forecast a budget deficit of 15.9% of GDP this financial year, 0.2 percentage points wider than expected by Finance Minister Tito Mboweni in June.

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Africa’s most industrialised economy was already in recession before the pandemic struck in spring and restrictions on households and businesses to curb the spread of the coronavirus have exacerbated its problems.

The poll saw the deficit narrowing to 10.0% of GDP next year and then to 9.0% in financial year 2022/23. The minister’s June budget forecast deficits then of 9.3% and 7.6% respectively.

The Treasury, unable to collect a lot of taxes when one of the world’s strictest lockdowns almost halted economic activity, is due to review its own economic projections next week.

“As a result of the strict lockdown that was imposed in the wake of the pandemic, including a temporary ban on the consumption of alcohol and tobacco, excise duties were down 68.1% y/y, corporate income taxes shrank by 25%,” said Michael Kafe at Barclays. The strict lockdown period was roughly five months, until South African authorities relaxed the rules on September 20.

“The travel restrictions also brought the cumulative fuel levy inflows down 49% from R31.7 billion in the first five months of FY2019-20 to R22.8bn in August 2020,” Kafe said.

But he added that the full-year undershoot in revenues could be minimal as the economy has already begun to show signs of a modest rebound, which should aid tax collection in the second half of the fiscal year.

Coronavirus has left many indebted countries in crisis and seeking International Monetary Fund and World Bank assistance.

The IMF estimates the pandemic and associated lockdowns have triggered unprecedented fiscal support by governments, worth almost 12% of global GDP, as of September 11.

South Africa’s gross debt will climb to 92% of GDP by 2023/24, the Reuters poll showed, just shy of the 100% level which Mboweni warned it could exceed in 2025.

A national lockdown meant the economy contracted 51% in the second quarter but growth last quarter was estimated at 44%. That heady pace will slow to 6.9% this quarter, medians showed.

The economy will contract 8.5% this year and grow 3.5% next year, the poll found. Weak demand will keep inflation tame, allowing the South African Reserve Bank to leave interest rates at 3.5% through 2021.

Source: moneyweb.co.za