Experts weigh in on Godongwana’s mini-budget
The Medium-Term Budget Policy Statement (MTBPS) showed some fiscal slippage, but there are some positive signs that could put South Africa on the right path.
Finance Minister Enoch Godongwana delivered the MTBPS on Wednesday, 30 October 2024.
This was the first MTBPS presented under the newly formed Government of National Unity (GNU), and many, therefore, had high expectations.
In his statement, Godongwana reported that the government’s tax collection for 2024/25 is expected to be R22.3 billion lower than what the Treasury estimated in February this year.
In addition, he said that, over the next two years, the main budget revenue estimate has also been lowered by R31.2 billion.
“In the absence of faster growth and in the face of external risks, tax revenue will remain under pressure, forcing us to make difficult decisions on where to spend,” he said.
“Lower revenue also means that we cannot, within the envelope, accommodate all of the demands on the fiscus.”
Godongwana said difficult trade-offs in all spheres of government will have to be made.
The minister also addressed the government’s significant debt problem. The National Treasury anticipates that government debt will reach more than R6.05 trillion, or 75.5% of GDP, in 2025/26.
“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,” he said.
The minister confirmed that debt-service costs will reach R388.9 billion in the current financial year.
“To deal with this problem, we have taken difficult steps to reduce the budget deficit. We have restrained spending and maintained stable tax collection,” Godongwana said.
As a result of these measures, the government achieved a primary budget surplus in 2023/24 for the first time in 15 years.
Since the MTBPS was presented, several industry experts have weighed in. Below is an overview of their analyses.
Arthur Kamp – Sanlam Investments chief economist
Sanlam Investments’ Arthur Kamp said the MTBPS was a mix of good and bad news.
He noted that the ratio of debt to GDP has slipped slightly in the current fiscal year from the February projection due to lower tax collection.
However, encouragingly, the debt ratio is expected to peak next year at 75% of GDP and then decline.
He said it is also important to note the government’s primary budget balance, which is revenue less non-interest spending.
That is projected to improve from a surplus of 0.4% of GDP this year to 1.8% of GDP by 2027/28, which will help stabilise the debt ratio.
National Treasury predicts the South African economy will grow by an average of 1.8% a year for the next three years.
“Kickstarting economic growth through infrastructure projects is essential; otherwise, unemployment and social spending will remain high,” Kamp said.
He pointed out some risks to this in the form of pressures on spending, including the National Health Insurance scheme, transfers to state-owned entities and public servants’ wage increases, which will average 4.5% a year for the next three years.
“These raise questions about fiscal consolidation, but the overall direction is the right one,” he said.
Maarten Ackerman – Citadel chief economist
Citadel’s Maarten Ackerman said the medium-term budget was fair and transparent – and made it quite clear that more hard work was needed to fix economic growth, growing debt and the country’s continued greylisting.
He said the MTBPS poured cold water on all the good news the market was expecting about an improving economy following the formation of a GNU, improved energy security and lowering inflation.
“From the minister’s opening sentence on domestic outlook, the MTBPS was a reality check on the positive expectations prior to this announcement,” he said.
“There were no short-term wins in any of the numbers. The rand weakened, and bonds sold off immediately because the budget is based on the reality on the ground and not just positive thinking.”
“We can’t fault the budget, however. The process has been thorough and world-class.”
However, Ackerman said it’s important to remember that South Africa’s economic growth remains hindered by high debt and expenses.
Despite some positive steps, including increased infrastructure spending and debt relief for municipalities, the country still faces significant challenges.
Key issues still facing the country include, crucially, its high debt, as South Africa’s debt-to-GDP ratio is unsustainable, and the country’s debt servicing costs are among the highest in the world.
“The only reason we are still sub-80% is because of the monetisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) in February, which took away some of Treasury’s funding pressures,” Ackerman said.
“On the positive side, we did achieve a positive primary balance, but that excludes debt payment costs, which we can’t just ignore as it is now more than 20% of budget expenditure.”
Ackerman said it was very concerning that South Africa fared the worst out of 94 emerging market economies in terms of the country’s debt trajectory.
Both the percentage of debt-to-GDP and the country’s debt servicing costs were far higher than all the other emerging markets.
Another risk South Africa’s fiscus faces is the ever-growing public sector wage bill. Ackerman said the government’s high wage bill is a major drain on resources, and efforts to reduce it through early retirement packages are necessary but insufficient.
“The big elephant in the room is still the public sector wage bill, and today we were told we rank third highest in the world at about 14% of GDP, whereas the global average is only 10%,” he said.
“They also made the point that we are much higher than the rest of the world on general government employment levels, so it is good news to hear that the government is offering about 30,000 public servants early retirement packages.”
“In the short-term, unfortunately, it feeds into the government’s high debt (at a cost of R11 billion), but we appreciate that it is a difficult task, and at least they are taking big steps to lower the wage bill.”
Other risks include necessary structural reforms, as South Africa’s deep-rooted structural issues, such as inefficient state-owned enterprises and corruption, continue to hamper economic growth.
While the government has outlined a plan to address these challenges, including focusing on macroeconomic stability, structural reforms, infrastructure investment, and improved state capability, significant hurdles remain.
Economic growth is expected to be modest in the near future, with above-capacity growth only likely in the longer term.
Annabel Bishop – Investec chief economist
Investec’s Annabel Bishop said the 2024 MTBPS revealed a deterioration in South Africa’s fiscal outlook, against expectations. This includes a wider budget deficit, a lower growth forecast and rising debt.
Bishop said this deterioration was reflected in the markets after the statement, as the rand weakened against the US dollar following the MTBPS announcement, and increased borrowing needs led to higher bond yields.
She noted that the government plans to increase spending on economic development, including infrastructure and economic regulation.
“Rapid expenditure on economic developments is positive, supportive of economic growth, although the sub-category with the largest growth rate is on economic regulation and infrastructure, at 10.9% annual growth between 2024/25 to 2027/28,” she said.
“A massive jump in expenditure on regulations, and so more onerous regulatory environment is a disincentive for investment while cutting red tape, and regulatory complexity would be a distinct positive in comparison.”
She explained that the most important factor for investors is the reward versus risk of their investment.
“A weak economic growth environment is not encouraging for foreign direct investment, with South Africa’s growth rate seen below 2.0% y/y until 2028 by National Treasury’s.”
Bishop explained that, overall, the MTBPS highlighted the challenges facing South Africa’s economy.
While the government’s focus on infrastructure spending is positive, concerns remain about the sustainability of public finances and the impact of increased regulation on economic growth.
Wichard Cilliers – TreasuryONE director and head of market risk
TreasuryONE’s Wichard Cilliers said South Africa’s medium-term budget highlighted critical issues impacting the country’s economic stability and growth.
He noted that the country’s debt levels have soared, with borrowings at 74.1% of GDP, which is costly to service, demanding debt stabilisation strategies.
“Plans are set to reduce the budget deficit and maintain primary surpluses for a decade to contain borrowing,” he said.
Cilliers pointed out that a significant portion of the budget goes to social welfare, with 31% of citizens receiving grants, far exceeding emerging-market norms.
In addition, the Road Accident Fund faces a steep financial gap, expecting a deficit as its provisions rise and municipalities struggle with unpaid debt.
He said public sector wages are high, but Treasury proposed early retirements as a cost-cutting measure.
Investment in infrastructure, particularly “gross fixed capital formation,” is below target, further threatening growth.
In addition, lower tax revenue from fuel levies, VAT, and income tax, despite gains from corporates, will require fiscal adjustments.
“Water management is another concern, as the country consumes above the global average, with infrastructure issues leading to wastage,” he said.
Cilliers said the rand reacted slightly negatively to the news, which was mostly not new but just once again highlights the issues we as a country face.
Professor Raymond Parsons – NWU Business School economist
The NWU’s Professor Raymond Parsons said that, given the fine budgetary line that the Finance Minister still had to walk, the GNU’s first MTBPS came across as a pragmatic, realistic and credible strategy to again tackle South Africa’s challenges of low economic growth and high public debt.
He said the MTBPS was broadly aligned with the GNU’s overarching commitment to higher inclusive economic growth and job creation.
“It is welcome news that South Africa is now achieving a primary budget surplus and that the debt-to-GDP ratio is to be stabilised at 75.5%, although debt reduction is to be spread over a longer period,” he said.
However, he said that risks to the fiscal outlook remain elevated, with the public sector wage bill remaining the biggest single immediate risk to South Africa’s public finances.
“The emphasis in the 2024 MTBPS was, therefore, to further consolidate longer-term fiscal buffers and guardrails that must help to ensure fiscal sustainability,” he said.
“The fiscal data and commitments supporting the MTBPS will nonetheless need to be further interrogated when the promised Medium Term Development Plan in January is available, and the main Budget is presented in February.”
He said the Finance Minister was right to say that South Africa’s problem is ‘basically a growth one’.
He explained that the MTBPS assumption of a modest average 1.8% GDP growth over the next three years reinforces the need for an action-orientated agenda to improve on these growth prospects.
“What South Africa needs is a couple of years of steady and irreversible economic growth to convert short-term business confidence into long-term investor confidence,” he said.
“This means that the GNU must ‘stay on message’ regarding its economic commitments in the period ahead.”
Overall, Parsons believes the MTBPS offers a clear economic direction, balancing growth-enhancing measures with debt stabilization. He said successful implementation over the next three years is key to achieving this balance.
“The challenge to GNU policymaking is, therefore, to create a macro-economic environment indisputably based on the pillars of efficiency, stability, consistency and certainty,” he said.
Elna Moolman – Standard Bank chief economist
Standard Banks’ Elna Moolman said that, as expected, the government is still committed to stabilising its debt-GDP ratio after a steep increase in recent years, and the Treasury still expects this ratio to peak next year.
“Notwithstanding this strategy to improve the fiscal prognosis, there was some slippage in the key fiscal metrics relative to the 2024 Budget forecasts,” she said.
However, she said this worsening was broadly in line with Standard Bank’s expectations in the near term but modestly worse than expected in the medium term.
“As we expected, the MTBPS encouragingly placed significant emphasis on growth and fiscal reforms, with new interventions to accelerate infrastructure spending clearly a priority for government,” she said.
“On balance, this is a growth-supportive fiscal statement, and there might indeed be some upside risk to the medium-term fiscal forecasts from Treasury’s somewhat conservative economic growth estimates that remain below 2%.”
“At the same time, there are still adverse spending risks, including from possible support required by SOEs in due course.”
Overall, Moolman said the fiscal strategy and direction remain unchanged, but the extent of the fiscal slippage, though modest, remains disappointing.
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