Godongwana’s plan to save the budget

Minister of Finance Enoch Godongwana

South Africa’s National Treasury said it would ramp up borrowing, trim spending and raise taxes to compensate for a revenue shortfall, spiralling debt-servicing costs and a higher state wage bill.

The government expects to collect R56.8 billion less tax than it anticipated at the time of the February budget, largely because energy shortages and logistics constraints curtailed mining companies’ profitability, the Treasury said in its mid-term budget policy statement.

To help plug the gap, domestic bond sales will be increased by 14% this fiscal year.

The borrowing requirement will also rise significantly over the next three years, averaging R553.7 billion, and gross debt is set to exceed 6 trillion rand by the end of March 2026.

‘Significantly weaker’

“Our public finances are significantly weaker” than they were in February, with several potential risks to the economy having materialized, Finance Minister Enoch Godongwana told lawmakers in Cape Town on Wednesday.

“Measures to stabilize public finances and reform the economy to generate higher growth are essential.”

The rand strengthened 0.3% against the dollar as the finance minister spoke before paring gains, while the yield on the government bond due 2035 declined about seven basis points to 12.17% as investors digested the news.

Investors have long voiced concern that South Africa’s debt trajectory is becoming unsustainable, with the average yield on government bonds reaching 9.5% last month.

“Although the finance minister delivered a gloomy speech, markets might feel somewhat relieved that there weren’t any major surprises,” Jee-A van der Linde, senior economist at Oxford Economics, wrote in a note to clients.

“That said, reform changes are coming through too slowly. The sustained increase in South Africa’s gross government debt together with the tightening of financial conditions mean that financing risks have risen.”

Looming election

But with elections looming next year and the governing African National Congress pushing back against the curtailment of services, Godongwana had no option but to increase bond issuance despite the limited appetite.

The government is aware of pushback from local investors against increased bond sales but remains confident the extra debt can be absorbed, Terry Msomi, the Treasury’s director of debt insurance and management, said in an interview.

“There are various factors that have led to investors being at the upper end of their take-up of government bonds, and that is obviously a worry going forward,” Msomi said.

However, relative to peer countries, “we present still probably the best value, in so far as the yield and risk dynamics,” and the Treasury remains committed to consolidating debt and the fiscal trajectory, he said.

The budget deficit is expected to reach 4.9% of gross domestic product for the fiscal year through March next year, up from 4% projected in February and narrow to 3.6% by 2026-27.

Gross debt is seen peaking at 77.7% of GDP in 2025-26, as opposed to February’s forecast of 73.6%. 

Godongwana signalled that he will raise taxes in February with a view to collecting an additional R15 billion in the next fiscal year.

Non-interest expenditure will also be cut by a net R3.7 billion in the year through March and by a net R85 billion over the following two fiscal years, mainly by reducing allocations to government departments and provincial administrations. 

Africa’s most industrialised economy is projected to expand 0.8% this year, marginally less than was forecast at the time of the budget, and by 1% in 2024. Power outages that have hobbled output are expected to gradually ease next year, the Treasury said.

No money was allocated to beleaguered state logistics company Transnet, which has been pleading for a bailout.

The Treasury is working with the Department of Public Enterprises to ensure that Transnet can meet its existing debt obligations, but no financial support will be forthcoming until the company has implemented financial and operation reforms, Godongwana said.

“There is clearly a very strong line on future bailouts for SOEs and Transnet in particular,” said Peter Attard Montalto, managing director at Krutham in London, referring to state-owned enterprises.

“National Treasury will extract a very significant reform pound of flesh.”

The budget update does provide for a year-long extension of a R350 monthly welfare grant that was introduced to shield the vulnerable against the fallout of the global pandemic.

A deal struck with civil servants in March will be implemented and push up the state’s wage bill by R24 billion this year and another R74 billion over the following three years.  

The policy statement “sets out our strategy for avoiding a fiscal crisis and preventing the build-up of systemic risks to the economy,” Godongwana said.

“None of these decisions are taken lightly. They are taken with the short- and long-term viability of public finances in mind and in the interests of balanced and inclusive growth.”


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