In a recent revelation, Fitch Ratings has raised concerns over the National Treasury’s optimistic projections regarding South Africa’s public wage bill, cautioning that this miscalculation may further exacerbate the nation’s burgeoning debt. The agency’s warning follows the delivery of the 2023 medium-term budget policy statement by Finance Minister Enoch Godongwana on November 1st. Fitch’s apprehensions center around the minister’s perceived “optimism” concerning the wage bill, signaling potential risks to the country’s economic stability.
Fitch highlighted disparities between the National Treasury’s forecasts and the actual economic trajectory, emphasizing that these discrepancies could contribute to an escalation of South Africa’s debt crisis. Minister Godongwana revised the medium-term projection for government debt/GDP, aligning it more closely with Fitch’s September forecast, which predicted a ratio of 78.5% by FY26. Both figures surpass the 76.9% assumed by Fitch in July and significantly exceed the government’s initial forecast of 73.6% outlined in the 2023 Budget.
A major point of contention raised by Fitch pertains to the public-sector wage bill assumptions outlined in the Medium-Term Budget Policy Statement (MTBPS). Fitch expressed reservations about the government’s optimism, asserting that the projections for wage growth may be unrealistic, posing a substantial threat to increased government debt. The MTBPS anticipates a consolidated wage bill increase of 5.1% for FY24 and 2.2% for FY25, figures lower than the 7.5% pay increase for FY24 and the CPI-linked increase for FY25 specified in the last public-sector wage agreement.
Fitch’s projections for Consumer Price Index (CPI) inflation reaching 5% in FY25 further compound concerns over the government’s wage bill projections. While achieving the stated targets may be plausible through measures such as headcount reductions, Fitch deems this unlikely due to the upcoming general election in May 2024, resistance from unions, and high socio-political risks. The agency emphasizes the difficulty of significant headcount reduction, given South Africa’s political landscape.
South Africa’s government wage bill has been a recurring risk factor for the nation’s escalating debt levels, with the government consistently falling short of its intentions and targets. Despite the National Treasury’s firm stance against wage hikes in 2023, subsequent public sector strikes resulted in a 7.5% increase, translating to a staggering additional spend of R33.7 billion on wages. The direct cost to the Treasury is estimated at R23.6 billion, necessitating government departments to find the remaining R10.1 billion through reprioritization of budgeted funds.
The government’s wage bill has soared from R408 billion in 2013/2014 to R724 billion in 2023/2024, painting a concerning picture of fiscal mismanagement. Despite this significant expenditure, South Africa has little to show for it, with state-owned enterprises collapsing, and public services in a state of disarray. Moreover, South Africa’s government employee wage bill stands among the highest in emerging markets, surpassing the OECD average by 3.5% as a share of GDP.
Fitch posits that the only “durable” resolution to South Africa’s fiscal challenges lies in a substantial acceleration of economic growth. However, current projections indicate only a marginal improvement in GDP growth to 0.9% in 2024 and 1.3% in 2025, from 0.5% in 2023. This poses a formidable obstacle to fiscal consolidation, leaving South Africa grappling with the need for transformative economic policies.
As South Africa grapples with a persistently challenging economic landscape, Fitch’s warning serves as a stark reminder of the imperative need for a comprehensive and realistic approach to fiscal management. The government’s historical difficulties in managing the wage bill underscore the complexity of the situation, necessitating a strategic and forward-thinking economic agenda to address the root causes of the nation’s financial challenges. In the face of upcoming elections, striking a balance between political appeasement and fiscal prudence becomes crucial for steering South Africa toward a sustainable and resilient economic future.
This website uses cookies.
