Concerns over South Africa’s medium-term budget
South Africa’s fiscal metrics will likely show some deterioration when Finance Minister Enoch Godongwana announces the Medium-Term Budget Policy Statement (MTBPS) on 1 November.
Investec Chief Economist Annabel Bishop said that Godongwana has already warned that the country needs to cut back on expenditure as revenue collections have faltered amid low economic growth and a poor export year.
Failures at Eskom and Transnet have particularly hurt the nation’s economic performance, with the MTBPS expected to give an update on the debt of both SOEs.
“Inflation will come out closer to 6.0% y/y for this year versus the 5.3% y/y forecast in February, which would boost nominal GDP somewhat, but both the fiscal debt and deficit outcomes are likely to be higher for the current fiscal year than projected on overspending and revenue underruns,” Bishop said.
“The budget deficit for 2023/24 was projected at -4.0% of GDP, but we now expect -4.5%, with 2024/25 estimated at -3.8% and 2025/26 at -3.2% (likely -4.0% and -3.4% instead, respectively).”
Although the gross loan debt for the current fiscal year (2023/24) was expected to reach 72.2% of GDP in the February Budget review for 2023, far higher government spending – following a 7.5% public sector wage increase for 2023/24 – places pressure on debt ratios in an environment of declining revenues.
For instance, Stats SA noted that company tax collection has disappointed this last financial year, as the local mining industry – a major bright spark last year – more than halved its contributions in Q2 2023.
The fiscal debt and deficit ratios will thus depend on the government and businesses’ success in turning around the state’s logistics and power utilities.
Climate change costs will also feature at the MTBPS, even if South Africa mainly focuses on bringing on renewable energy projects. With the government stating that it plans to add or recover 12,000 MW by the end of next year, load shedding should start to ease.
“However, faster economic growth adds to demand-side pressure, and next year GDP growth is expected to rise to 1.2% y/y,” Bishop said.
Although Moody’s said in February that it did not expect a significant widening of the fiscal deficit due to predicted abundant spending cuts, Bishop noted that the government has not cut spending, which could worsen the fiscal ratio.
“South Africa will need to see a curb on expenditure and higher revenues for the rest of the 2023/24 fiscal year to achieve its fiscal estimates, and markets are wary that in a low growth environment with high, and rising, bond yields this becomes more difficult,” Bishop said.
“The MTBPS will be scrutinised for cost-saving measures that will allow the fiscal projections to be met. SA’s borrowings are already unsustainable, at well above the EM (emerging market) limit of 60% of GDP, and previously set to rise higher, undermining the rand, and adding to higher borrowing costs.”
Loading ...