SA is on track for modest growth in the second quarter despite load-shedding rising sharply, says Absa bank.
But it warned that the outlook for public finances remain fragile, pointing to low revenue collection and weaker commodity prices.
The bank, one of SA’s top four, now forecasts real GDP growth of 0.7% in 2023, 0.4 percentage points higher than in the last estimate. It maintains a view that SA’s fiscal position remains “extremely challenging”.
Absa said it now forecasts a revenue shortfall of R39bn, from R25bn previously, compared with the 2023 budget target.
Absa senior economist Miyelani Maluleke said this is mainly because of underlying Treasury data so far this fiscal year pointing to a widening budget deficit.
This is captured in Absa’s economic research report released on Monday showing that for the second quarter as a whole, corporate income tax collections were down 22.5% compared with the previous year’s. VAT receipts were flat at 0.3% year on year.
Personal income tax saw 9.5% growth in collections in the April-June period — a respectable performance, Maluleke said, in the face of seemingly subdued wage growth, a tepid employment recovery and anecdotal reports of significant emigration of wealthy individuals.
This places finance minister Enoch Godongwana in a difficult situation as he must not only deal with dwindling tax revenues but must also contend with main budget expenditures that continue to rise faster than inflation as well as unbudgeted spending pressures.
Godongwana and his team have worked hard to put SA on a sustainable fiscal path. In February, the Treasury said the consolidated budget deficit would narrow to 4.0% of GDP in the fiscal year ending in February 2024, the lowest in four years.
The latest advancements show otherwise. Two civil society organisations recently launched a court action demanding the government increase the monetary value of the social relief of distress (SRD) grant and to change the grant’s eligibility criteria to allow for more beneficiaries.
The Treasury allocated an extra R36bn to the SRD grant in the 2023/24 fiscal year. The grant, in its current form reaches 7.97-million people. The SA Post Office, in business rescue proceedings, may receive more funding above the R2.4bn bailout in the 2023 budget adding to fiscal pressure. With tax collection seemingly stalled and muted growth prospects and commodity price outlook bank sees little reason for rapid recovery
Absa also mentioned Transnet, which asked for R40bn at the October medium-term budget policy statement in 2022 but was allocated only R5.8bn in the February budget. In June, Transnet told parliament its loan redemptions over the next five years would be R65bn, while its capex programme for the next five years would be about R100bn, a situation that would leave the state-owned entity with a sizeable funding requirement, after operational cash flows are deducted.
The National Health Insurance Bill, implementation of which will entail considerable fiscal spending, was passed by the National Assembly in June.
“As we have argued before, other loss-making state-owned companies may also present bailout demands that the Treasury and the government may have to accommodate. Overall, the above suggests that further bailout demands are likely unless the government embarks on a major effort to attract private capital [for Transnet] into the rail and ports businesses,” said Maluleke.
“Nonetheless, overall tax collections now seem to have stalled and given the muted growth prospects and commodity price outlook, we see little reason for a rapid recovery,” he said.
Maluleke said that taking into account Eskom’s R254bn debt relief, they estimate a main budget deficit of 6.6% of GDP in fiscal 2023/24, up from their previous 6.3% forecast.
“Importantly, our approach suggests an average primary budget deficit of 1.1% of GDP in the three-year period of Eskom’s envisaged staggered debt relief. Only in financial year 2026/27, will the primary budget balance likely revert to a surplus,” he said.
He said Absa’s debt forecast is materially higher than the Treasury’s 2023 budget estimates because their forecast incorporates some additional spending, lower revenues and tighter financing conditions.
He said in the 2023 budget, the Treasury estimated that a one percentage point increase in short- and long-term interest rates increases the debt servicing burden by almost R6bn, or about 0.1% of GDP.
“As a consequence, public indebtedness will continue to rise and breach 80% of GDP, in our view.” Maluleke said. “With SA’s chronically weak GDP growth lagging the real interest rate on the government’s debt obligations, stabilisation of the debt burden requires the government to run a primary budget surplus, and SA is unlikely to achieve this any time soon.”
Other issues that affect the economic outlook is political uncertainty that remains high in the run up to general elections in 2024. Absa also cited SA-Russia relations as another risk having generated adverse market reaction and fanned concern about possible sanctions and expulsion from the Agoa trade arrangement.
The bank also highlighted sharp rises in debt-servicing costs further eroding households’ disposable incomes as well as increasing signs of rising consumer debt distress with arrears rising.
Absa said it believes the Reserve Bank’s hiking cycle has ended but warned that with global interest rates likely to remain higher for longer and SA gradually becoming a riskier investment amid weak growth and deteriorating public finances, it now expects a terminal repo rate of 7.50% compared with its previous forecast of 7.00%.
zwanet@businesslive.co.za
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