leeroy mupariri
All eyes will be on Finance Minister Enoch Godongwana next Wednesday, October 30, when he delivers his Medium-Term Budget Policy Statement (MTBPS).
Everyone hopes he will fulfil rather high expectations.
Economists and financial sector experts seem to root for him, saying he is in a remarkable position to announce a vast improvement in SA’s economic and financial well-being.
They expect him to use the upswing to commit to an acceleration of the reforms behind this improvement to tackle remaining problem areas.
Gregory Rammego, managing director of Deloitte’s Africa Risk Advisory, says the medium-term budget will reflect that SA is on an upward trajectory.
“Recent figures showed that the economy is recovering, even if economic growth is lower than earlier projections,” says Rammego.
“The GDP figures for the second quarter showed that consumption spending increased and several economic sectors improved.
Overall, the improvement of electricity supply supported the economy.
“This is positive for tax collection and we can expect that the minister will announce that tax revenue in the current fiscal year is ahead of budget.”
GNU
All the commentators referred to the government of national unity (GNU), saying it is working well and that stability in government is paving the road for improvement.
Rammego says greater stability in parliament and legislative processes is “looking good” and conducive to good governance despite policy differences between the parties.
“I am encouraged by how managing these differences in policies is playing out.
“Government is in a good position to use money wisely to fund priorities,” he says, listing permanent solutions to the problems plaguing electricity supply and roads, rail, ports and water supply.
“Further reforms are needed to make it possible for the private sector to partner with the public sector to find solutions. I expect the finance minister to announce further reforms, which will accelerate economic growth and create employment.
“Although we are on a positive trajectory, we must remember that SA still has problems.
“Government wants to see 3 percent GDP growth per annum. It is possible and within the capabilities of the GNU to achieve [that],” says Rammego.
In addition, he expects the minister to address at least three important issues:
To continue and commit to the cost-cutting measures that were announced in the February budget;
To outline the benefits of not having load shedding and commit funding to permanent solutions; and
To give an update on what has been done to restore SA’s financial reputation and remove the country from the Financial Action Task Force’s ‘grey list’.
Higher growth
Citadel chief economist Maarten Ackerman expects the MTBPS to show that SA’s economic prospects have improved.
“Compared to the February budget, I do think that there is room for higher growth estimates, thanks to improved political stability following the formation of the GNU, as well as greater electricity production and less load shedding, and the recent interest rate cuts, which should bring some consumer relief.
“We’re also happy to see some investment spending taking place to address the country’s infrastructure issues.
“Another factor that could have stimulated more economic growth since the elections is the emergence of a more ‘business-focused’ government.
“As a result of that, the government is now in a position not only to focus on the populist checklist, but to stick to fiscal austerity and get growth on track and the economy going,” says Ackerman.
Citadel expects economic growth to increase to above 1,5 percent over the next year, compared to GDP growth of only 0,6 percent in 2023, when it was hit by ongoing electricity shortages, transport sector woes and lower international earnings on gold and platinum group metals.
“If the economy strengthens, it implies that tax revenue can also increase. However, one needs to consider that in the year to date, revenue collection came under pressure and Sars did not collect as much as Treasury had budgeted for in February,” says Ackerman, marking this as a piece of bad news to expect on October 30.
Ackerman says the minister might also mention the public wage bill.
“Public servants recently asked for a 12 percent pay increase, which the government countered with a 3 percent offer. It is one of the crucial factors that one needs to address in the budget going forward if we are to consider or be able to get any rating upgrade from any of the rating agencies.
“The R100 billion worth of gold and foreign exchange reserves that came into the monetary system, because of the monetisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) in February, took away some of Treasury’s funding pressures, but this windfall will not last much longer.
“Once this injection dries up, we will have to rein in once again on the expense side, particularly in terms of cuts in government spending on items such as the public sector wage bill,” he says, adding that the stronger rand reduces the value of gold and foreign exchange and thus government’s ability to keep on tapping into this source of easy money.
Stability
Sanisha Packirisamy, chief economist at Momentum Investments, also referred to the positives of the new cooperative form of government.
“The establishment of the GNU has created a framework for enhanced political stability, fiscal responsibility and renewed optimism regarding economic reforms in SA. By fostering collaboration, the GNU has a chance to rebuild public trust in government, which is essential for boosting both domestic and international investment,” she says.
“Since the last economic forecast update by National Treasury in February 2024, growth in the medium term is likely to be adjusted higher on the back of an improvement in SA’s network industries, in particular, electricity, and early pension withdrawals related to the two-pot retirement reforms.
“Despite displaying one of the sharpest rates of deterioration in the debt-to-gross domestic product profile, Treasury’s February 2024 estimates highlight a faster anticipated contraction in the SA government’s budget deficit ratio and an earlier stabilisation in the debt ratio relative to developed market and emerging market composites,” she adds.
Packirisamy expects the finance minister to focus on five aspects she identifies as “pressure points” in the economy:
Budget deficit: Momentum Investments expects the MTBPS to follow the trajectory set out by the 2024 national budget in February, reinforcing the goal of achieving primary budget surpluses to stabilise SA’s debt-to-GDP ratio.
Current tax revenue trends suggest a potential shortfall of between R10 billion and R20 billion, while expenditure is likely to remain close to or slightly below Treasury’s February 2024 forecasts.
Cost containment: Containing the public wage bill has already led to vacancies in critical roles in sectors including healthcare, exacerbating the decline in service delivery as the government strives to contain the public sector wage bill.
Public entities with persistent financial pressures: Transnet’s ability to invest in expansion is hampered by limited cash flow, rising debt servicing costs on a R130 billion debt pile and a steep debt maturity schedule, leaving most of its spending focused on maintenance rather than expansion.
Potential financing for plugging the budget gap: Fiscal performance is expected to largely align with the February 2024 budget estimates, and the R100 billion in GFECRA cash has alleviated funding pressure, so we do not anticipate any major changes in domestic issuance in the near term.
Prospective risks to sovereign ratings: The prospect of fiscal consolidation under the GNU, coupled with ongoing reform efforts in SA, could be sufficient to shift the country’s sovereign rating from a “neutral” or “stable” outlook to a “positive” outlook in the first half of next year.
However, Packirisamy says a formal rating upgrade is unlikely to be considered until late 2025 or early 2026.
“Rating agencies typically require a proven track record of reform implementation and clear evidence that these efforts are driving sustained growth,” she says. — Moneyweb
