This budget has an exceedingly uncertain economic backdrop. The new US administration has hiked tariffs on numerous products from several countries. Further, there have already been adjustments to the initial policy announcements. In response, there have been retaliatory measures from certain US trading partners.
South Africa-specific policy measures, including President Donald Trump’s executive order to suspend all aid to the country (though this was subsequently at least temporarily amended), worsen the idiosyncratic uncertainty. There is also a risk of further, potentially even more damaging, steps. The risks to economic growth underpin uncertainty about the South African government’s revenue trajectory.
Further, the risks to the government’s spending trajectory are also particularly elevated. A recent court case has increased the pressure to expand social grant support, even though its suspension, after the government’s appeal, staves off the immediate risk. Further, the government’s latest wage offer appears to exceed the current budget allocation in this regard.
The government may in due course have to take on a measure of the expenses now covered by US aid to South Africa. While the government has been firm about not bailing out either local or provincial governments, it may at some stage ease the pressure from elevated, and still escalating, municipal debt to Eskom as well as various water boards. In fact, certain SOEs, notably Transnet, have already requested significant fiscal support.
All these pressures and uncertainties complicate the government’s aim to put South Africa’s fiscal trajectory on a sustainable path after the significant deterioration of recent years. Notably, over the past decade, the debt-GDP ratio has increased by nearly 30 percentage points (while the average of emerging markets and advanced economies increased by only 17 and nine percentage points respectively). Further, South Africa’s annual interest bill exceeds its total spending on social grants by R171bn a year.
South Africa’s strategy — to stabilise its debt — addresses both government revenue and expenditure. The government has been reining in spending by limiting growth in departmental spending and impelling departments to absorb, for example, any extent to which compensation costs exceed the budgeted allocation — by either curbing employment or cutting other spending.
It is also applying a “tough love” approach to SOE support, with a growing reluctance to merely plug the holes with cash injections. Instead, any financial support will be highly conditional, including in the case of sectors such as logistics and energy, to increase private sector participation. Furthermore, the government will increasingly turn to alternative funding mechanisms rather than provide full funding shortfalls to SOEs. For Transnet, for example, the government will likely provide some guarantees to support the entity’s borrowing — and then steer it towards blended finance options (which would include other funding sources too).
Efforts to boost revenue include improving Sars's collection capacity and reforms to lift trend economic growth. Meaningful, albeit gradual, traction with reforms underpins our expectation for a material improvement in the country's trend growth rate. Reforms have already led to improved electricity availability, as well as an increase in railed volumes and a reduction in port delays. Other reforms under way include making it easier to import skills. Further, a new mining cadastral system is in progress for implementation by midyear.
These improvements — to boost economic growth and revenues as well as to curb spending — have been boosting the fiscal prognosis. However, in the upcoming budget the government’s resolve will be tested, given the confluence of current risks. Nevertheless, we’d expect the government to stay the course and keep key fiscal metrics in line with those projected in the October 2024 medium-term budget policy statement. . However, avoiding material slippage will be no mean feat, considering the current conditions.
The most important aspect of the budget will be whether the debt-GDP trajectory is still credibly projected to stabilise soon, and whether the predicted peak is not materially higher than before. If so, investors should view South Africa as remaining on course despite the now far more challenging global situation.
Similar to the structural economic reforms, in which the hard work took a while to be visible (such as with the electricity reforms that ease the power constraint), taking pragmatic fiscal decisions now will ultimately put the country on a sustainable fiscal path, even if there are setbacks in the interim.
• Moolman is head of South African macroeconomic research at Standard Bank Group
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