In the week before finance minister Enoch Godongwana delivers his medium-term budget policy statement, economists have come up with a rather specific wish list aimed at alleviating some of SA’s biggest woes.
They urge Godongwana to implement measures that will prioritise policies that grow the economy, address Eskom’s financial issues head-on, and stimulate reform to regain investor confidence.
Citadel’s chief economist Maarten Ackerman said they will pay close attention to how Godongwana balances aid and growth. Ackerman said the medium-term budget must prioritise economic growth policies to get SA out of its debt spiral.
“We’ll need to see what the finance minister does with the revenue windfall. We’d like to see it being used productively, not just on one-off temporary social spending that does little to nothing to drive economic growth,” said Ackerman.
In addition to providing the Treasury’s updated forecast of the likely budget outcome for this fiscal year, Godongwana will also recalibrate the medium-term expenditure framework and tax-collection projections. He will include a statement on the medium- and long-term risks to public finances, and a detailed analysis of spending on public compensation.
Speaking at the annual conference of the Government Employees Pension Fund, Godongwana warned that downside risks to the economy are intensifying. He cited intensifying load-shedding, worsening geopolitical tension, faltering Chinese growth, rising inflation and tighter global financial conditions leading to capital outflows from emerging markets.
Godongwana said the combination of these risks could have a negative effect on the fiscus. But despite a poorer growth outlook, fiscal developments since February — notably main budget data from June to August and provisional financing data for September — continue to support an even more positive view.
Monthly Treasury budget figures show that tax revenue exceeded the February budget estimate by R162bn, or more than 2% of GDP. Taking into account the usual seasonality in monthly tax revenue, the overrun could be closer to R110bn, about 1.5% of GDP.
Ackerman said that how Godongwana uses “or misuses” the revenue overrun is extremely important as SA’s debt-to-GDP ratio is already far higher than it has been over the past decade.
“The deficit also poses a risk, so the fact that we are seeing slightly better numbers doesn’t mean the difficulties are behind us. If anything goes belly up, we’ll be close to the fiscal cliff again that [former finance] minister Tito Mboweni warned us about,” he said.
Absa chief economist Peter Worthington said they are waiting for answers, especially on the future of the Social Relief of Distress (SRD) grant, which was due to expire at the end of this fiscal year. They want to see the broad outlines of the government’s approach to the long-awaited Eskom debt deal. Godongwana promised to disclose the quantum, timing and conditions associated with the power utility’s debt-relief package.
“We had been sceptical that the National Treasury would have advanced discussions with Eskom sufficiently to be able to present a comprehensive plan, but Godongwana’s latest comments are an encouraging sign that investors may get some certainty on this long-running issue,” said Worthington.
“That said, some details are likely to remain unsettled. For example, Godongwana said that the government had not decided whether to target just Eskom’s guaranteed debt for relief or also to include unguaranteed debt.”
Worthington said the ANC’s waning popularity with voters suggests Godongwana might not have any political support within the cabinet for curtailing the SRD, so the medium-term budget “is key to watch in this regard”.
The pace of spending also warrants watching, given that government spending will jump when a pay deal is signed with public-sector unions.
Fiscal data already shows rising spending on compensation. Reserve Bank figures show strong growth of 5.9% year on year in compensation of employees of the national and provincial governments in the second quarter.
“Given the compensation data for quarter two and the fact that an above-budget pay deal is likely to be agreed upon before the end of this fiscal year — and show up with a bolus of back pay to 1 April — it seems highly likely that compensation spending will be higher in financial year 22/23 than the Treasury assumed in the February budget,” said Worthington.
Investec chief economist Annabel Bishop said they expect gross loan debt will come to 69.2% of GDP for 2021/2022, vs the 69.5% of GDP projection in the February 2022 budget before the GDP revisions.
While state finances improved somewhat comparatively against GDP, the improvement can be easily overridden by increasing state borrowing, “which should not be used to fund SOE operations”, said Bishop.
She said borrowings should be used for fixed investment as the purpose of fixed investment is also to yield a return and prove self-financing in the longer-term.
“While there are no downgrades expected this year, ratings agencies will worry about the growth outlook, particularly as state-owned entities fail to support demand for their services in full, limiting the pace of economic growth, and so employment in the private sector,” she said.
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