Economists have warned that increasing spending pressures on the national budget, worsened by rotational blackouts that are impeding economic growth as well as tax revenue, may make delivering a credible budget “a very difficult task”.
They say the country’s lacklustre medium-term growth outlook is a concern, and something credit ratings agencies could flag as a downside risk.
The warning comes as Enoch Godongwana, the finance minister, prepares to present the 2023 national budget in parliament next week.
Godongwana is expected to highlight the better-than-expected fiscal performance over the past year. He will note good expenditure control and strong tax collection and emphasise relatively strong GDP growth for 2022 as well as a slightly better budget deficit.
Data shows that in the first nine months of the fiscal year, main budget non-interest expenditures were up just 2.3% on an annual basis, against the medium-term budget policy statement target of 5.6% growth for the same financial year. Main budget revenues were up 7.6% year on year in the first three quarters of this fiscal year, a little shy of the medium-term budget target of 8.3%, while the cumulative main budget deficit for April-December 2022 sits at R183bn.
But the 2023 national budget comes at a difficult time when many parts of the country face severe floods — which are damaging infrastructure that will need to be repaired over the medium term — load-shedding and an increase in spending risks.
Africa economist at Oxford Economics Jee-A van der Linde told Business Day that with spending pressures high, delivering a credible budget will not be easy, especially with a lacklustre medium-term growth outlook, “something credit ratings agencies will flag as a key downside risk”.
Van der Linde said: “Higher debt levels and rising interest payments do not bode well for SA’s sovereign credit rating.”
Investec chief economist Annabel Bishop said the National Treasury was likely to move below 1% year on year for its 2023 real GDP growth forecast and drop its GDP growth projections for 2024 and 2025 as well.
“Treasury would do well to err on the side of caution and not collapse its economic growth forecasts as drastically as the Reserve Bank has done for this year and the next few, as this would push up the debt and GDP ratios, and so worsen the projected health of government finances,” Bishop said.
Such an outcome would be credit negative for the ratings agencies, she said.
Allan Gray portfolio manager Thalia Petousis said while there may be scope for small positive revisions to the 2022/2023 figure in the current SA budget, “my concern lies in the credibility of Treasury’s estimate for the outer years of the forecast period over 2024 to 2026”.
“Back in 2019, the budget forecast estimated that SA’s debt load would stabilise at 60% of GDP by 2023. At present, our debt load sits above 70% of GDP, or almost R700bn more,” Petousis said.
Alexforbes economist Murendeni Nengovhela expected the biggest talking point to be Eskom’s debt. The Treasury is said to be finalising a solution to Eskom’s R400bn debt burden to support the power utility in securing more funding for diesel for the rest of the 2022/2023 financial year.
“But there has been no mention of support in the medium term. We expect the Treasury to take up about R200bn to R250bn of Eskom’s debt, which will push gross debt to GDP to 75.3% from the previous projection of 71.4%,” Nengovhela said.
Old Mutual group chief economist Johann Els is more positive in his outlook and expects Godongwana to continue with strong emphasis on fiscal consolidation.
Els said he does not anticipate that the government will take on any populist measures but rather that it will take on more policy measures to cut red tape and lift growth.
“For the new fiscal year, the MTBPS [medium-term budget policy statement] estimated deficit target for 2023/2024 of 4.1%. This budget should stick to that target and the need to reduce the deficit further over the next few years towards 3%.
“I expect the deficit to be higher at about 4.3% of GDP. This should not be perceived as significant slippage as long as the medium-term framework still aims at lower deficits,” Els said.
Ratings
The reduction in the fiscal risk thus far has already resulted in ratings having bottomed out and they are not expected to fall further, he said.
“We have seen upgrades in all three agencies’ outlook statements. Further positive action with respect to the outlook statements are likely if the budget follows in the footsteps of the Oct 2022 MTBPS,” Els said.
He said if this happens, Moody’s and Fitch could potentially lift their outlook statements from stable to positive to align with the positive outlook of S&P.
Els said ratings upgrades will take another few years.
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