The latest Treasury budget data suggests a further widening in the main budget deficit as total expenditure continues to grow at a faster pace than revenue, raising the prospect of a fiscal crisis.
The main budget deficit was R47.3bn in August, or R63.3bn including Eskom debt relief above the line, compared with a R42.7bn deficit in August 2022.
The department’s provisional financing data for September also points to a main budget deficit of R12.8bn, which compares with a deficit of R3.3bn in September 2022.
This suggests a widening in the main budget deficit relative to the same month in 2022, leaving investors, who now wait for the Treasury’s medium-term budget policy statement on November 1, concerned.
According to the Treasury, total revenue growth was 8.7% year on year in August while total expenditure continued to grow at a stronger pace of 9.2%.
The cumulative main budget deficit in the first five months of the 2023/24 fiscal year amounts to R238.4bn, or R254.4bn including Eskom debt relief above the line, much higher than the deficit of R160.7bn in the same period in 2022/23.
The Treasury has been worried about the country’s public spending. In August it proposed guidelines on cost containment measures for 2023/24, warning that the government faced unprecedented revenue and spending pressures as the economy falters amid load-shedding, inflation and stagnant growth.
Treasury proposals included budget cuts across the government in the run-up to the medium-term budget. The Treasury also instructed that budgets be slashed by up to 15% and vacancies and infrastructure rollout programmes frozen.
But the ANC faces a tough election in 2024 and its top leadership worries that the hardship caused by withdrawing the R350 social relief of distress grant (SRD) could cost the party support and stoke social unrest, risking a repeat of the lethal violence unleashed in 2021.
Old Mutual Investment Group portfolio manager John Orford said escalating debt levels present a significant concern for the fiscus.
“Worse-than-budgeted revenue collection and expenditure overruns have raised the prospects of a fiscal crisis,” Orford said. “Escalating debt levels present a significant concern for the fiscus, as they shave off a growing share of the budget to cover the interest on the debt, consequently diminishing the funds to be allocated for crucial service and infrastructure.”
Asset allocations
He said that while concerns of a debt default are exaggerated, as SA’s debt is mostly in local currency, a failure to check the rise in the debt-to-GDP ratio could put further pressure on interest rates, the currency and the inflation outlook. “These factors could force asset managers to re-evaluate asset allocations across their portfolios.”
Orford said portfolio managers must now consider factors such as the effective cost of servicing debt, the share of government expenditure allocated to servicing interest and capital repayments, the maturity profile and currency mix of debt and investor willingness to lend to the government.
“Faster economic growth, lower interest rates and a higher primary surplus or lower primary deficit would result in a lower debt-to-GDP ratio,” Orford said. “However, government expenditure is the only component directly under government control, making the fulfilment of promised austerity measures vital.”
He said the Bureau for Economic Research has raised concerns about the medium-term debt trajectory as the primary budget outlook continues to deteriorate, with a recent estimate of a R72bn revenue collection shortfall for 2023/24.
In a research report, Absa bank 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.
Outlook
Maluleke said the Treasury allocated an extra R36bn to the SRD grant in 2023/24. He said that the SA Post Office, which is in business rescue proceedings, may receive more funding in addition to the R2.4bn bailout in the 2023 budget, adding to the fiscal pressure.
“With tax collection seemingly stalled and muted growth prospects and commodity price outlook, we see little reason for rapid recovery,” he said.
Maluleke 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 that its loan redemptions over the next five years would be R65bn, while its capital expenditure programme for the next five years would be about R100bn, a situation that would leave it with a sizeable funding requirement after operational cash flows are deducted.
A high debt-to-GDP ratio significantly affects the domestic economy as it increases lending risk, leading to higher compensation demands from investors.
Orford said higher bond yields are needed to incentivise investors to continue funding the government deficit, putting pressure on the overall cost of capital in the country, increasing the investment hurdle rate for the private sector and consequently reducing investment in the domestic economy.
“This leads to a ‘crowding out’, where banks choose to invest in government debt rather than lending to the private sector,” he said. “Locally orientated and cyclical businesses are particularly vulnerable to rising debt costs, exacerbated by government actions like cutting social spending or raising taxes.”
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