Markets, investors and credit ratings agencies will keep a close watch on finance minister Enoch Godongwana as he announces the tough choices made on Eskom debt, the social relief grant and the details of climate financing at the medium-term budget policy statement (MTBPS) next week.
Alexforbes chief economist Isaah Mhlanga said these three issues will determine the country’s fiscal position and its debt level over the medium term as well as reaffirm the country’s credit rating.
“Most consequential is a solution to reduce Eskom’s R392bn debt to improve its balance sheet so that it can finance itself in the open market,” Mhlanga said during a webinar on Thursday. “The debt relief is widely expected in the region of R200bn. There are no easy solutions as the currency composition and exchange rate movements affect what can and can’t be done.”
More so, he said, the terms of the debt provided by development finance institutions and credit export agencies are likely to be difficult and lengthy to negotiate for a debt transfer solution.
“Markets, investors and credit ratings agencies expect some solution to properly assess SA’s fiscal position and therefore credit rating,” Mhlanga said.
Gondongwana’s policy statement comes against the backdrop of a challenging global outlook. In its World Economic Outlook released last week, the IMF said it expects 34% of the global economy to be in recession this year or in 2023, up from just under 5% at the beginning of the year.
Russia’s war on Ukraine has heightened the acceleration in global inflation, particularly food and energy. The euro area’s economy is in recession due to the energy crisis after the reduction of gas supplies from Russia.
The UK’s inflation, interest rate, growth and fiscal outlooks have worsened after the announcement of the now partially reversed unfunded fiscal stimulus.
Meanwhile, rising US interest rates will slow US and global growth to near recession in 2023. A global cost of living crisis and debt distress in some emerging markets present challenges for policymakers.
It is within this global context that Godongwana is also expected to make an announcement on the social relief of distress (SRD) grant.
Given the cost-of-living crisis on top of the Covid-19 impact, the government has been under pressure to convert the SRD grant into a permanent universal basic income grant (BIG).
Introduced at the height of the pandemic, the R350 a month SRD grant to South Africans with no other form of income costs the fiscus about R45bn a year.
“We expect that the SRD will be extended for another year to March 2024, but remain unfunded after that,” Mhlanga said. “This would signal that it’s a temporary measure and that future extensions will only depend on the availability of funding from tax revenue collections and economic growth.”
Mhlanga said if there was a permanent BIG, there would be a recession within five years.
According to Nedbank, if the relief grant is introduced into perpetuity, it would cost at least R48bn a year, over and above the R250bn spent on social grants (excluding the SRD) in 2022/2023.
“We are not expecting budget to be allocated to it [the SRD]. If the National Treasury misses this point, bond markets will sell off. They must signal that it is temporary and it is important to see this being repeated,” he said.
“A basic income grant that is funded by debt is what leads to a fiscal crisis in five years. If it is funded by an increase in taxes, it means we will have structurally lower economic growth in the future, lower than 2%. It is a slow burn, and will lead to a fiscal crisis,” Mhlanga said.
There is also an expectation that the minister will share details on the structure, quantum and terms of the $8.5bn just transition financing. “Key here will be how much is disbursed, the terms attached to them and whether this increases the state’s debt levels or not,” Mhlanga said. “A lot remains unclear, and details will clarify the assessment of the fiscal position.”
He said the government wage bill and the funding of other state-owned entities will be important for the fiscal position and credit ratings.
“Beyond the immediate year, fiscal policy must frame government’s strategy on solving long-standing policies that will encourage investment, grow the economy, create jobs and reduce poverty. In this respect we expect very little to change in the MTBPS as all is encompassed in the economic and recovery plan, of which we expect an update of progress made since the February 2022 budget,” he said.
He said Alexforbes expects that actual fiscal deficit and debt ratios are likely to show marginal improvement for this fiscal year and next, but the medium term has risks of derailment.
“We expect the fiscal deficit of just under 5% of GDP and a debt ratio to improve to 70% of GDP, peak around 73% of GDP but be sticky above 70% of GDP over the medium term,” Mhlanga said.
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