Finance

South Africa gets out the R3 trillion begging bowl

The first budget update delivered by South Africa’s business-friendly coalition government shows a worsening debt trajectory and a marginally improved outlook for economic growth, heightening the need to lure more investment.

The fiscal deficit is expected to widen to 5% of gross domestic product in the year through March, the medium-term budget policy statement delivered by Finance Minister Enoch Godongwana on Wednesday shows.

That’s up from 4.5% projected in February, and higher than most economists predicted.

Africa’s largest economy is forecast to expand an average of 1.8% over the next three years, slightly higher than previously estimated yet still insufficient to keep pace with population growth.

The revised estimates illustrate the extent of the challenge the new 10-party administration faces in meeting its goals of boosting output and employment while stabilizing state finances.

The ratio of debt to gross domestic product is still expected to stabilize in the 2025-26 fiscal year but is now seen doing so at 75.5%, higher than the 75.3% expected in February. 

“We know that our debt is unsustainable because debt-service costs have become the largest component of our spending, and it is rising faster than economic growth,” Godongwana said in his speech to lawmakers in Cape Town.

“To deal with this problem, we have taken difficult steps to reduce the budget deficit. We have restrained spending and maintained stable tax collection.” 

Even so, tax revenue for the current fiscal year is set to fall R22.3 billion short of the target, with income from value-added tax, personal income tax and fuel levies all disappointing. 

The National Treasury allocated additional funds to pay for a peacekeeping mission in the Democratic Republic of Congo and cover debts stemming from an abandoned freeway tolling project.

It also set aside R11 billion for an early retirement plan for civil servants over the next two years, a measure that should help contain its burgeoning wage bill. 

The new alliance took office in late June, a month after the African National Congress lost the parliamentary majority it had held since apartheid ended in 1994.

The inclusion of the centrist Democratic Alliance and other business-friendly parties sparked a rally in the nation’s currency, stocks and bonds, with investors banking on the government to tackle logistics constraints, energy shortages and red tape that has hindered businesses. 

Some progress has been made: after years of blackouts, the country has had months of uninterrupted electricity, working visa rules have been overhauled, and the government is opening up rail lines to private operators. 

The National Treasury said the government is evaluating various options to encourage private investment in infrastructure projects, including developing a platform with a credit-guarantee facility to help alleviate risk associated with public sector projects. New financing mechanisms are also under consideration.

President Cyril Ramaphosa has pledged to turn the country into a giant construction site. He estimates that as much as R1.6 trillion in public-sector infrastructure investment and a further R3.2 trillion from the private sector will be needed for the country to achieve its infrastructure goals by 2030. 

Fitch Ratings and Moody’s Ratings may review their assessment of South Africa’s debt this week following the presentation of the budget update, while S&P Global Ratings’ review is due on November 15.

All three companies have a sub-investment grade rating in South Africa with a stable outlook. 

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