The Treasury is more optimistic about economic growth this year but has warned of several risks that threaten its forecasts.
Growth for this year has been revised upwards from the 1.8% forecast in November’s medium term budget policy statement to 2.1% but the 2021 growth rate has been revised downwards from 5.1% to 4.8% due to the weaker than expected third-quarter outcome due to the July unrest in KwaZulu-Natal and Gauteng and heightened global uncertainty.
Commodity prices slowed in the second half of 2021 and Covid-19 restrictions reduced gains in the first half of the year. Industrial action in the manufacturing sector and load-shedding also slowed recovery.
The forecasts for the outer two years remain unchanged at 1.6% and 1.7% for 2023 and 2024 respectively with electricity supply constraints remaining a brake on growth.
“Our economic recovery has been uneven and risks remain high. We must proceed with caution,” finance minister Enoch Godongwana said in his budget speech in the National Assembly. He said that the Treasury expects the world economy to grow 4.4%, lower than the 4.9% stated in the medium term budget policy statement.
The Treasury projects headline inflation to be 4.8% in 2022, 4.4% in 2023 and 4.5% in 2024, all within the inflation-targeting band, though it warns that medium-term risks are on the upside “primarily as a result of price increases from food and nonalcoholic beverages along with petrol, energy and other administered prices”. There is also a risk that electricity inflation may exceed the assumption that 2022 and 2023 electricity prices rise in line with Eskom’s application for a tariff increase in 2022/23.
The Treasury has highlighted several risks to the economic outlook in the Budget Review including new Covid-19 variants leading to new waves of infection in the context of a low vaccination rate in the country, continued interruptions in Eskom’s power supply, rising inflation and fiscal risks. Faster-than-expected global interest rate increases would also have negative consequences for the economy while slowing global growth also poses a risk.
“Global growth could slow more rapidly if supply-chain bottlenecks persist, leading to sustained price pressures and rising inflation expectations or if Chinese growth slows,” the Treasury said in the Budget Review. “Faster interest rate increases could tighten financial market conditions and increase market volatility.”
The Treasury has painted two growth scenarios, one positive and the other negative.
The upside scenario assumes that fiscal consolidation is complemented by accelerated economic reforms including ensuring energy security, reducing red tape and lowering the cost of doing business through improved transport and communication infrastructure.
“Confidence levels improve supporting a marked easing of sovereign risk and lowering economywide borrowing costs,” Treasury said. “These changes bolster private investment levels and consumer demand. GDP increases above the baseline forecast and is 0.7 percentage points higher by 2024. The cumulative effect of these gains is compounded over the long term, raising potential growth.”
The pessimistic scenario paints a picture of weaker global growth and more persistent global inflation which leads to a rapid tightening of monetary policy.
“Mounting risk aversion takes its toll as SA’s risk premium and borrowing costs increase and feed into economywide borrowing costs. This in turn reduces local business investment and erodes consumer purchasing power.”
As weaker global demand depresses exports and commodity prices, GDP averages 0.4 percentage points below the baseline between 2022 and 2024. “The delayed recovery entrenches scarring from the pandemic and reduces long term potential growth. The weaker exchange rate, higher input costs and imported inflation push CPI (consumer price inflation) to 5.1% moderating to 4.5% in 2024.”
A further deterioration in public finances due to spending pressures and the materialisation of contingent liabilities (from state owned companies) could trigger additional credit rating downgrades, increasing borrowing costs and crowding out both private and public investment.
Government has placed much emphasis on structural economic reforms as being a driver of growth and the Treasury says that the revised licensing thresholds and energy reforms may raise fixed investment and the economic outlook over the medium term.
Several initiatives have been launched to increase electricity supply, reduce red tape and promote industrial growth through sectoral master plans. Also, public sector infrastructure spending over the next three years is estimated at R812.5bn with R17.5bn being set aside in the budget over this period for infrastructure catalytic projects.
The budget put forward by the Treasury sees the government achieving a primary surplus — where revenue is higher than noninterest spending in 2023/2024, a year earlier than expected at the time of the medium term budget policy statement. This will bring the period of fiscal consolidation to a close.
The improvement in the fiscal metrics has been made possible by the better than expected tax revenue — R181.9bn higher than the 2021 budget forecast — due to the commodity exports boom.
Risks to the fiscal outlook include a global or domestic economic slowdown, rising borrowing costs, the materialisation of contingent liabilities from state-owned companies and higher than budgeted public sector wage bill.
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