South Africa aims to lock in gains with proposed fiscal law

South Africa has introduced a proposed fiscal law aimed at safeguarding its public finances from potential populist governments as debt is projected to decline for the first time in nearly two decades. Finance Minister Enoch Godongwana highlighted the legislation as a means to protect "hard-won gains" following the party's failure to secure a second term in the 2024 election, which forced them into a coalition government.

Under the draft measure unveiled alongside the recent budget update, future administrations would be able to set their own targets, including the debt-to-GDP ratio, a key metric monitored by credit rating agencies. However, an independent parliamentary oversight body would ensure compliance. If a government strays from the established targets, elected officials would be required to provide explanations for their actions.

Unlike fiscal rules in many other countries, South Africa's prospective law does not prescribe a numerical ceiling on debt or spending. Instead, it emphasizes the importance of adhering to announced plans. Finance Minister Godongwana reported that government debt had stabilized at about $366 billion (78% of GDP), up from around 24% in 2009.

The budget deficit was projected to decline as a percentage of GDP over the next three years. Additionally, the government announced a second fuel-price relief package amounting to $600 million to support struggling motorists.

Economists believe that these figures are promising enough to warrant a credit rating upgrade. Gina Schoeman of Citi anticipates a probable credit rating upgrade within the first six months of the next year rather than the immediate future. In contrast to the International Monetary Fund (IMF), which advocated for a "fiscal rule anchored in a prudent debt ceiling" earlier this year, Godongwana's approach allows for more flexibility and requires governments to explain their actions if they deviate from the set targets.

This proposal has drawn mixed reactions. While some argue that the law could help maintain fiscal discipline, others contend that it lacks specificity and may not be effective in preventing governments from bending the rules when political circumstances demand it. South Africa's fiscal challenges have persisted despite explanations such as global crises, sluggish growth, state capture, and COVID-19.

Critics argue that the law's requirement for governments to align their fiscal plans with electoral mandates could lead to populist policies being incorporated into fiscal plans, potentially resulting in further downgrades of credit ratings and increased borrowing costs.