Treasury’s monthly budget data showed revenue of R204.3-billion in June, against expenditure of R141.1-billion. The extra cash, mainly from corporate income taxes, has given Treasury space to finance a R38-billion relief plan hastened by the unrest triggered by former President Jacob Zuma’s arrest and stricter lockdown due to surging Covid-19 infections. 

Finance Minister Tito Mboweni and his team of top National Treasury officials were quick to add that the relief package, which includes the reinstatement of the monthly R350 social relief of distress (SRD) grant for the unemployed following significant pressure from civil society, would be temporary, budget neutral, and would not involve any additional borrowing.  

The surplus may also provide the South African Reserve Bank (Sarb) scope to keep interest rates lower for longer, with the rand so far shielded from the impact of rising political risk and mounting signs that ultra-low interest rates globally, led by the Federal Reserve in the United States, may be coming to an end.

But bowing to popular and political pressure to expand welfare transfers amidst lacklustre economic growth, rather than holding the line on strict fiscal consolidation as promised in the February budget, may spook investors and ratings agencies that have so far given Mboweni the benefit of the doubt. 

“I think this is a negative development, as the market was expecting a large windfall from this revenue overshoot, which could have reduced the deficit and debt projections by 1% of GDP,” said Reezwana Sumad, senior economist at Nedbank.

South Africa’s budget deficit more than doubled from under 6% of GDP in 2019 to an estimated 14% shortfall in 2021. Treasury aims to bring it down to -9.3% in the current fiscal year. That is heavily hinged on cuts of more than R200-billion in spending on public servants. This has partly been achieved, with last week’s agreement of a 1% increase for public servants.

Mboweni also vowed to narrow the debt-to-GDP ratio, which is approaching the 90% red line. 

During the last commodity supercycle, Pretoria used the profits to greatly expand welfare transfers, cut taxes, increase public sector wages, and borrow heavily, without bothering much with structural reforms necessary to sustain GDP growth, partly leading to the current fiscal crisis. 

A repeat of that modus operandi will likely be quickly punished by investors this time around, in the form of credit ratings downgrades and more expensive debt. 

“The government has demonstrated resolve in sticking to its spending targets but risks remain and we have some concerns that the relief from the commodity windfall could weaken the path towards fiscal consolidation,” said economist at HSBC, David Faulkner, in a note. 

“Long-term debt sustainability demands structural reforms to boost growth,” said Faulkner.

Sarb chief Lesetja Kganyago has repeatedly cited high borrowing costs as an obstacle to economic growth and keeping lending rates low. 

Part of the central bank’s unwritten mandate is to help the central government keep its borrowing costs low. It can achieve this by pressing down the short end of the bond curve by keeping repo rates low, which then drags down interest rates across the curve. 

The yield curve has, however, remained steep, and foreign holdings of South Africa’s bonds have tumbled, reflecting investors’ nervousness about the country’s debt trajectory.  

Non-resident holdings have fallen sharply in the last year, to their lowest in close to a decade, from just below 40% to under or near 30%. That has left local banks, insurers, and investment houses to pick up the slack. On Monday JSE data showed foreigners had sold nearly R48-billion worth of SA bonds year-to-date. BM/DM