The National Treasury’s most recent budget data lays bare the cold, hard reality facing finance minister Enoch Godongwana as he prepares to deliver the medium-term budget policy statement (MTBPS).
The country is in a precarious fiscal position that requires urgent attention, while surveys show that support for the governing ANC could well fall below 50% in the general elections scheduled for 2024.
The Treasury on Monday reported that the budget deficit soared to R14.6bn in September from R3.3bn a year earlier, taking the gap in the first six months of the fiscal year to R253bn — a year-on-year increase of 54%.
Barring a miracle Godongwana will therefore announce a huge underperformance in revenue collections on Wednesday and mushrooming expenditure for 2023/24.
Total revenue in the first six months of the fiscal year was down 0.2% year on year, while gross tax revenue was up just 2.4% on an annual basis, well below the Treasury’s full-year growth target of 6%.
Meanwhile, total expenditure growth is running 9.2% higher than at the same time last year, and far above the Treasury’s full-year target of 1.5% growth.
“This confirms the finance minister will face an uphill task to deliver fiscal consolidation,” said Absa senior economist Miyelani Maluleke, who forecast a September budget deficit of R12.8bn based on the provisional financing data.
“It is expected that the policy statement will announce an underperformance in revenue collections and expenditure slippage for 2023/24, resulting in a much wider main budget deficit than anticipated in February.”
Moreover, several fiscal risks outlined in the main budget in February have materialised, with the medium-term budget taking place against the backdrop of unprecedented load-shedding and sharply lower export commodity prices, which have hammered tax receipts.
In addition, Godongwana has to contend with sluggish economic growth, high government debt, an unemployment crisis, a ballooning public sector wage bill, rising inflation and the impact of geopolitical events.
Tough balancing act
Prof Raymond Parsons of the North-West University Business School said those factors have severely reduced available fiscal space, necessitating a realistic approach to a less favourable set of circumstances and will make Godongwana’s medium-term budget a tough balancing act.
Anchor Capital investment analyst Casey Delport said the substantial rise in SA’s risk premium and the notable steepening of the SA government bond yield curve throughout 2023 are a clear indication of SA’s declining fiscal health.
“Since the February budget announcement, there has been a significant uptick in [SA government bond] yields. This increase can be attributed to a combination of factors, including the rise in US treasury yields, the depreciation of the rand, escalating power outages and the nation’s fiscal difficulties,” she said.
“These factors have led to a notable rise in yields across all maturities” of SA government bonds, Delport said.
Long-term bond yields have surged by more than 100 basis points (bps) since the February budget, while short-term bond yields have seen an increase of nearly 40bps. “This steepening of the yield curve underscores the market’s apprehension regarding the potential further deterioration of the country’s economic prospects and fiscal challenges.”
Delport added that the market focus will be on how the Treasury plans to finance the expected budget deficit.
Allan Gray portfolio manager Thalia Petousis said SA’s debt-to-GDP ration has been deteriorating at a faster rate than other major emerging markets since 2018, primarily as a result of the growth in the interest bill versus the slow pace of growth of the economy, tax revenue and the savings pool (that is, rent on debt versus growth of national income).
Fiscal deterioration
“With a cost of debt at 11% to 13%, the only way to prevent severe fiscal deterioration in the absence of robust economic growth and stabilise our debt is to run a continual primary surplus of 1.5% to 3% GDP,” she said.
“To maintain a strong primary surplus would require austerity, which is a thorny issue in a country with such high levels of social poverty.
“The unsurprising culprits [for the budget deficit] are the public sector wage bill, which grew at roughly 7.4% year on year versus the 1.6% budgeted, as well as a 20% decline in corporate income tax collection,” Petousis added.
Maluleke said stabilising debt will be a difficult challenge in the absence of growth. Beyond the current fiscal year, the big challenge for the medium-term budget is to reaffirm its commitment to stabilising the debt burden over the medium term.
“The primary challenge for this medium-term budget is to outline a credible set of durable expenditure and revenue measures against a challenging macro environment.
“The policy statement should also reaffirm commitment towards stabilising debt over the medium term,” he said.
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