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The loss of government revenue will be much more severe than the decline in South Africa’s economic activity, says rating agency Moody’s.
In a research note on Thursday (September 10), the group cited the government’s June supplemental budget review, which projected a decline in main budget revenue to 22.6% of GDP in fiscal 2020.
“The loss of income will be much more serious than the fall in economic activity. The lower tax base derived from the blockade measures, the loss of jobs and the lower confidence explain the vast majority of the income deficit, ”he said.
“The tax relief measures included in the government support package are a secondary factor in the loss of revenue.”
Moody’s said that underperforming income has been a key credit challenge in South Africa for an extended period. At the same time, opposition from influential stakeholders, including unions, has limited the authorities’ ability to contain spending in response, he said.
The rating agency said the revenue shortfall will further complicate the supplemental budget’s debt stabilization goal by 2023.
On Tuesday (September 8), StatsSA announced that second-quarter GDP had contracted 16.4% quarter-on-quarter, as the lockdown measures weighed heavily on economic activity.
The mining, manufacturing and construction sectors were the main drag on the GDP growth rate, as production disruptions saw the three record contractions close to or equal to 30% qoq.
“Although we had already accounted for such a large drop in our full-year growth forecast, the recession will nonetheless intensify the government’s fiscal woes, particularly its ability to generate revenue,” Moody’s said.
“We also expect the shock to trigger a deterioration in asset quality that will erode the buffers of South African banks, which were strong before the crisis.”
Moody’s expects that the gradual lifting of restrictions driven by the pandemic will support a recovery in economic activity in the second half of 2020.
However, weak consumer and investor confidence, coupled with renewed cargo shedding by Eskom, will still lead to a 4.2% year-on-year contraction in the second half of 2020, it said.
“As a result, we maintain our expectation of a 6.5% recession for the full year. We expect the recovery to persist through 2021 and support 4.5% growth. However, the South African economy will not return to the economic activity levels of 2019 until 2023. “
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