Absa bank has added its voice to a list of institutions decrying the country’s public finances, which it says are challenged by weak growth and spending pressures.
SA’s fourth-largest bank warns that these pressures will only add to slippage in the present fiscal year and probably carry over into 2024/2025.
Finance Minister Enoch Godongwana is to present the 2024 budget on February 21 against the backdrop of a challenging growth outlook, and rising demands for higher spending.
Godongwana will be concerned about the outcome of the elections, the potential effect on policy and the government’s ability to implement policy in the next five years.
Also, given that the budget comes ahead of the elections, one of the big questions is whether government will announce big bursts of spending on areas such as free higher education or a basic income grant, said Absa senior economist Miyelani Maluleke.
“We have not pencilled into our baseline any new major spending allocations. SA does not have a history of sudden expenditure increases ahead of elections,” said Maluleke.
Maluleke warned though that the country’s expenditure side is more challenging. He said that in the medium-term budget policy statement last November, the Treasury announced that in-year-spending risks of R29.4bn, including a higher wage bill, would be plugged through expenditure reprioritisation.
The reprioritisation was to be through a combination of cuts in baseline spending, projected underspending for some programmes and a drawdown on the contingency reserve.
“However, Treasury’s main budget data for the first three quarters of the fiscal year suggest that the execution of the reprioritisation is proving to be difficult.
“Total expenditure growth in the first three quarters of the fiscal year was at 7.7% year-on-year, higher than the Treasury’s full-year target of 1.9%,” he said.
Absa expects expenditure slippage of R27bn for the 2023/2024 fiscal year against the medium-term budget target.
The economy came under severe pressure in the past year with the worst bouts of load-shedding on record, further deterioration in rail and port performance, weaker terms of trade and constrained consumers.
Consensus is that logistics infrastructure constraints seem likely to drag on for longer.
The performance of the freight rail network deteriorated at a staggeringly rapid pace over the past few years. Transnet’s data shows freight rail volumes in 2022/23 were down a third compared with the most recent peak in 2017/18.
This presents a huge challenge to bulk commodity producers, and saw economic activity fall in the third quarter, disappointing forecasts and shrinking by 0.2% quarter-on-quarter.
However, because the economy proved itself to be more resilient than expected with quarterly GDP growth in each of the first two quarters of 2023 coming in stronger, growing by 0.4% for quarter one and expanding by 0.6% in the second quarter.
“While the GDP contraction in quarter three raised some concerns about the possibility that SA would fall into recession in the second half of 2023, the available high frequency data for quarter four indicate mixed performance across different sectors. This suggests that on balance a recession has been avoided,” said Maluleke.
“We are expecting real GDP growth of 0.3% quarter-on-quarter in the fourth quarter. This leaves full-year 2023 growth at just 0.5%.”
Forecasts for 2024 are for real GDP growth to rise to 1.1% from an estimated 0.5% in 2023. Absa expects growth to average 1.7% growth in 2025-2027.
The bank expects headline inflation forecast of 5.1% for 2024, down from 5.9% in 2023, and core CPI inflation at 4.5% in 2024 from 4.8% in 2023.
The bank also forecasts interest rates to remain unchanged until the second half of this year with 75 basis points (bps) cut in 2024 starting with a 25 bps cut in July, taking the repo rate to 7.50% by year-end.
“Weak economic growth and persistent spending needs are a challenge for public finances,” said Maluleke.
He said the January provisional financing data published by Treasury on 2 February suggest a main budget deficit of R75bn for the month, which would take cumulative main budget deficit in the first 10 months of the fiscal year to R358bn.
“That said, the seasonality in personal income taxes tend to deliver a surplus in February. This leaves us with a main budget deficit of 5% of GDP for 2023/24, or 6.1% with Eskom debt relief support accounted for above the line, compared with the medium-term budget target deficit of 4.7% of GDP, or R330bn versus Treasury’s revised target of 4.7% due to some expenditure slippage.”
Maluleke said for the fiscal year ahead, we do not expect a sudden surge in government spending despite the general election.
Still, delivering a meaningful deficit reduction will be difficult amid weak growth and the difficulty of cutting spending. Further bailout support, particularly for Transnet, also cannot be ruled out, he said.
Maluleke said they believe that the Social Relief of Distress grant will be a permanent feature of SA’s public finances. Other upside spending pressures include Transnet, which has indicated it needs about R100bn for its turnaround plan. The Treasury provided a guarantee of R47bn late last year but there is risk of more direct support in the upcoming national budget.
Absa also said the National Health Insurance Bill, approved by parliament and sent to President Cyril Ramaphosa to sign into law, is one of the big risks in the medium term.
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