A tough year for South Africa

Commodity-exporting emerging markets and developing economies (EMDEs), like South Africa, are set to face significant fiscal challenges in 2024 if they do not cut back on expenditure.

This was revealed in the World Bank’s Global Economic Prospects, released on 9 January.

The report explains that government debt in commodity-exporting EMDEs has grown rapidly over the past decade – from around 33% of GDP in 2010 to about 58% in 2022.

In addition, their primary fiscal deficit averaged about three times that of commodity importers.

South Africa’s government is facing a deficit of around R347 billion for the 2023/24 financial year – over 40% more than the previous year.

This is according to Investec chief economist Annabel Bishop, who said the deficit to date for 2023/24 is already over R300 billion.

It currently stands at R312 billion, while the revised deficit for the full fiscal year is projected at R347 billion – a substantial increase from the R247 billion deficit in 2022/23.

Bishop added that gross loan debt is projected at 74.7% of GDP for 2023/24, significantly up from 70.9% in 2022/23.

It is also far higher than the 72.2% of GDP initially projected for 2023/24.

The World Bank explained that increased spending during the pandemic amplified the challenges confronting commodity-exporting EMDEs. 

“The higher cost of servicing elevated debt levels, coupled with weaker growth prospects, is increasing the risk of debt distress,” the report warned.

“The booms and busts in government revenues attributable to commodities tend to make fiscal policy both more procyclical and more volatile in commodity-exporting EMDEs, amplifying business cycles and harming growth.”

This problem was seen in South Africa in 2023, as the weakness in commodity prices, which fell by 9.8% year-on-year, negatively impacted the country’s exports and state revenue collections.

However, South Africa’s challenges were made doubly worse by the failures of Transnet and Eskom. 

Transnet’s logistics challenges made it more difficult for South Africa to transport commodities across the country for export.

Eskom’s failures also affected local companies’ bottom line as load-shedding impacted their production time and profits.

These domestic challenges cut into the revenue of commodity exporters like mining companies, making them pay less corporate tax than expected and, ultimately, affecting the country’s tax revenue.

To avoid severe fluctuations in revenue collections from commodity cycles, the World Bank recommended “more stable governments, a stronger rule of law, greater capital account openness, fiscal rules to constrain government spending”. 

“Stronger institutions and stricter constraints on fiscal policy have also been associated with less fiscal volatility,” the bank said.

“Medium-term expenditure frameworks can also help … by improving fiscal discipline.”

However, South Africa’s government has not cut back on expenditure despite revenue undershoots from a weak economy suffering from the country’s structural issues and the drop in commodity prices, said Bishop.

She said Medium-Term Expenditure Frameworks (MTEF) do not help when revenue undershoots planned collections substantially, widening budget deficits. 

Rather than curing expenditure, South Africa has resorted to increased borrowings to fill the gap. Bishop said this has weakened investor sentiment.