This update incorporates the latest monthly budget data, which has led us to revise our fiscal outlook. Given the better-than-expected tax revenue collections in November and December, we now expect an improvement in the near-term fiscal outlook. We have also updated our inflation forecast, which moved marginal higher following the release of the December CPI data. Our GDP growth and monetary policy outlooks remains unchanged. However, we now think the risks to the growth outlook are tilted to the downside compared to our previous assessment of upside risks.
Growth: We expect a slow and subdued recovery from the covid-19 crisis due to lower government spending and the impact of the pandemic lingering in the global and domestic economy for longer than we had originally anticipated. In addition, we expect existing electricity constraints to dampen the recovery. As a result, having contracted by an estimated 7.2% in 2020, we forecast that GDP will rise by 3.3%, 1.0% and 1.5% in 2021, 2022 and 2023, respectively. Our projected growth trajectory implies that real GDP is going to take about four years to recover to pre-covid levels. A lethargic global recovery, repeated covid-19 waves resulting in stringent lockdown measures and mounting fiscal pressures resulting in tight monetary policy could further dampen SA’s recovery, while a quick rollout of vaccines poses upside risk to the growth outlook.
Inflation: CPI inflation averaged 3.3% in 2020. Headline inflation will remain near the lower end of the inflation target range during the first quarter of 2021 as aided by health insurance inflation which is expected to decline to historic lows. During the second quarter, inflation is marked to rise to close to the midpoint of the target as the base effects from fuel prices push transport inflation sharply upwards. Inflation in 2021 is thus expected to be 0.5ppt higher, at 3.8%, than in 2020. As the economy normalises and domestic demand follows suit, we estimate inflation will rise to 4.3% and 4.8% in 2022 and 2023.
Monetary policy: The SARB has cut the repo rate by 3.0ppt during 2020, largely in response to the economic fallout from covid-19. The MPC has paused adding accommodation into the system to assess the impact of its frontloaded actions on the economy. We anticipate that the QPM will shave off the currently projected 2021 hikes during the course of the year as a result of a benign global policy environment, increasing but contained inflation and a return to growth, but with the economy remaining below its pre-covid size. As a result, we expect the MPC to keep interest rates on hold in 2021. The committee will continue to emphasise data dependence in making decisions to maintain the policy flexibility required during periods of heightened uncertainty. We expect the MPC to start hiking rates in 2H22 as inflation is projected to rise above the midpoint of the inflation target.
Fiscal policy: YTD (April 2020 to December 2020) collections point to a 10.6% y/y decline in total tax revenue for FY20/21, compared to NT’s Medium-Term Budget Policy Statement (MTBPS) estimate of -17.9% – leading to an improvement in the revenue outlook. Meanwhile, YTD main budget expenditure is also tracking in line with the NT’s expected 6.9% increase for FY20/21. Given the better revenue outlook, the budget deficit for FY20/21 comes out better than the MTBPS estimate. Over the Medium-Term Expenditure Framework (MTEF: FY21/22 to FY23/24), we think that a partial wage freeze is more probable than the outright freeze proposed in the MTBPS – resulting in higher expenditure relative to MTBPS estimates. On the tax revenue side, despite our conservative assumptions on tax buoyancies, the higher base in FY20/21 bodes well for FY21/22 and FY22/23 tax revenue collections. This, together with our expenditure outlook results in a narrower budget deficit for FY21/22 but wider budget deficits in FY22/23 and FY23/24 compared to NT’s MTBPS estimates. Despite the improvement in the near-term fiscal outlook, issues of debt sustainability continue to linger as the primary balance is projected to remain in deficit, while the interest rate on government debt is expected to remain higher than nominal GDP – implying that the debt-to-GDP trajectory will continue to rise.
Expected GDP recovery
Source: Stats SA and RMB Global Markets (Data as at January 2021)