The medium-term budget policy statement (MTBPS) and new finance minister Enoch Godongwana’s maiden budget delivery will dominate economic news this week.
Investors will be watching the extent to which Godongwana delivers on the government’s fiscal consolidation commitments, in the face of a commodities surge that has boosted tax revenue, and a strong political push to lock in additional welfare spending to support SA’s citizens still reeling from the effects of Covid-19.
The tax overrun for the 2021/2022 fiscal year is expected to come in at between R100bn and R160bn more than forecast in February’s budget, depending on different estimates. Nedbank expects the overrun to stretch to more than R350bn over the medium-term expenditure framework, compared with February’s estimates.
A test for Godongwana will be the extent to which he can defend the Treasury’s efforts to maintain spending curbs, drive efficiency and leverage some of the windfall to reverse SA’s still rising debt trajectory.
But the voices calling for a basic income grant have grown louder, while the extension of the R350 relief of distress grant is expected to be difficult to roll back.
Various analysts and SA Reserve Bank governor Lesetja Kganyago have warned against treating the commodities windfall as permanent and instituting spending increases that, in the long run, will worsen SA’s fiscal fault lines, which were so painfully evident before the pandemic added to these woes.
Godongwana is expected to outline where the unbudgeted roughly R19bn will come from to pay for the recent public sector wage settlement, which came with a monthly cash gratuity for civil servants. Uncertainty also exists over the outcome of the Constitutional Court’s decision on the 2018 wage deal, after the state refused to implement the final year of the agreement due to its battered finances.
These tensions notwithstanding, the revenue boost, as well as the recent revision of GDP numbers and a better-than-expected economic recovery, mean that SA’s fiscal metrics will look much better than forecast in February.
The Treasury is expected to up its growth forecast for 2021 from the 3.3% predicted in February, while the government’s debt-to-GDP ratio is expected to come down from the 81.9% for 2021/2022 forecast in February, with a peak of 88.9% in 2025/2026.
The budget deficit — which in the February budget was forecast to come in at 9.3% of GDP for 2021/2022, before declining to 7.3% and 6.3% in the following fiscal years — is forecast to come in at least one or two percentage points lower, with Absa expecting it to decline to as low as 5.6% of GDP.
The market will also be looking for more details on promised economic reforms and the work of Operation Vulindlela, which is intended to help speed these up, as well as any further support issued to embattled state-owned companies.
Credit ratings agencies are, however, likely to remain cautious on SA, according to Momentum Investments economist Sanisha Packirisamy. Though SA’s fiscal and debt ratios are likely to show “a notable improvement, debt remains at elevated levels and the pace of reforms remains modest against a backdrop of pedestrian growth”, she said.
“Given sticky medium-term fiscal and growth risks, we believe the bias to SA sovereign rating outlooks is to the downside in the medium term, despite an improved near-term outlook,” she said.
Mining and manufacturing data for September are due to be released on the same day as the MTBPS. A Bloomberg survey suggests that annual mining production will come in at 3.2% after August’s slower 2%, while manufacturing is expected to decline 1.3% year on year, after August’s better-than-expected 1.8%.
The decline in manufacturing is in line with indications from the September Absa purchasing managers’ index (PMI), which revealed a decline in business activity and softer sales orders, noted Investec’s Lara Hodes. “Persistent supply chain disruptions and materials shortages globally continue to hinder production, while domestically unreliable electricity supply remains a major constraint,” she said.
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