Finance

Eskom is wildcard in South Africa’s debt-stabilisation plan

South Africa set more ambitious targets to stabilise public finances without having to raise taxes and revealed the broad brushstrokes of a plan to tackle the state power utility’s unsustainable debt in its budget update.

State debt will peak at 71.4% of gross domestic product in the current fiscal year – two years earlier and almost four percentage points lower than previously predicted, while the budget shortfall is expected to narrow through 2026, Finance Minister Enoch Godongwana told lawmakers in Cape Town on Wednesday.

That’s as the effects of higher inflation, which bolstered nominal GDP projections, and improved revenue-collection estimates outweigh the adverse impact of higher borrowing costs and a weaker exchange rate.

“When government finances are saddled with debt, it becomes very difficult to meet our development objectives,” Godongwana said. “We need to reduce our debt burden and debt-service costs.”

The medium-term budget policy statement shows President Cyril Ramaphosa is making good on his commitment to maintain fiscal prudence, although the outlook remains clouded by pleas for support from state companies, higher-than-budgeted pay demands by civil servants, a potential expansion of the social welfare net and tightening global financial conditions.

The government expects to shift between one-third and two-thirds of power utility Eskom’s debt of about R400 billion ($22.2 billion) onto its own balance sheet and attach strict conditions to the relief, according to Godongwana. More details will be announced in February.

The quantum of support and method of effecting the relief has yet to be finalized and isn’t directly accounted for in the updated fiscal metrics, said Edgar Sishi, the head of the budget office. One factor that will determine the amount of relief is future electricity-tariff increases currently being reviewed by the energy regulator, said Duncan Pieterse, the Treasury’s head of assets and liability management.

Revenue is now expected to overshoot previous estimates by R83.5 billion in the current fiscal year and almost R100 billion in each of the following two years. No new taxes are envisaged from next year onward, the Treasury said.

Godongwana affirmed his pledge to temper the public-service wage bill, which accounts for almost a third of government expenditure, even as labour unions plan to strike after pay talks deadlocked.

To “avoid pre-empting the wage negotiation process” no provisions for hikes in the year through March 2024 have been made, although “increases will need to remain within the available fiscal resources so as not compromise other spending priorities,” the Treasury said.

A R350 monthly welfare grant that was first introduced to cushion the poor against the fallout from the coronavirus pandemic will be extended for a third time through March 2024. The governing African National Congress holds up its social security program as among its greatest achievements in one of the world’s most unequal nations, and the latest extension could bolster its chances of retaining its electoral majority in 2024.

If the current monthly grant value and take-up rate remains constant and is extended indefinitely, the cost will grow at an annual average of 8.8% to reach 64.9 billion in 2031, and may threaten the sustainability of public finances, according to the Treasury.

“Discussions on the future of the grant are ongoing and involve very difficult trade-offs and financing decisions,” Godongwana said. “Any permanent extension or replacement will require increases in revenue, reductions in spending elsewhere or a combination of the two.”

The balance on the primary budget, the government’s most critical fiscal anchor, will now swing to a surplus of R46.1 billion, or 0.7% of GDP, in 2024, compared with a previous estimate R3.2 billion. Technical work on the introduction of a new, more robust anchor is ongoing, with the Treasury having already “tested the appropriateness” of a debt ceiling and expenditure or revenue rules.

After unexpected shocks ranging from the pandemic to deadly riots and floods, the Treasury will now increase its unallocated and contingency reserves to “cushion the framework from fiscal risks that may materialize over the medium-term,” it said.

The economy is expected to grow 1.9% this year, 0.2 percentage points less than previously forecast, and expand by an average of 1.6% over the next three years.

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