South Africa: Medium-Term Budget Policy Statement Preview
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
On November 1 finance minister Enoch Godongwana will table the 2023 medium-term budget policy statement (MTBPS) in parliament. Often referred to locally as the "mini budget", the MTBPS outlines the policy framework for the upcoming February budget. The MTBPS also serves to anchor expectations about the evolution of macroeconomic conditions by providing a projection of fiscal policy over the medium-term expenditure framework (MTEF) period.
Given the current economic and political climate, the finance minister is in the difficult position of being expected to present proposals that will encourage economic growth, increase revenue, stimulate investment and moderate debt levels. Depending on what the minister chooses to prioritise, he can choose to propose tax hikes, cut spending or increase borrowing.
The monthly budget deficit reached ZAR 143.8bn in July, the largest deficit since 2004 and wider than the ZAR 115.5bn predicted by economists. South Africa's fiscal deficit for 2023/24 is expected to be between 6% and 6.5% of GDP, much higher than the 4% the Treasury expected in February. Treasury aims to stabilise debt at 70% of GDP, but this year it has already risen to 72%. The IMF now expects gross debt to reach nearly 79% in 2025, compared to their earlier projection of 77.1%. When the MTBPS is tabled in November, there will be tough trade-offs for the country to contend with.
Economy under strain
The National Treasury and the central bank have warned in the past few months of the difficult global and domestic conditions that are hindering growth and fiscal sustainability. While the most recent economic growth forecasts for 2023 have improved since the beginning of the year, the projections are still relatively low at 0.7% (SARB) and 0.9% (IMF), compared to the 1.9% growth recorded in 2022. The major constraints to the economy are high unemployment, domestic power outages and logistic constraints, as well as high oil prices and a strong dollar.
The central bank says there is uncertainty around the direction inflation will take, as risks to the outlook heighten. Risks include elevated inflation expectations, loadshedding and oil prices which rose from USD 80 per barrel in the first half of the year to more than USD 90 in September. The central bank expects headline inflation's return to target to take some time. Headline inflation is expected to average 5.9% in 2023 and then slowly ease back within the midpoint of the 3-6% target range by 2025.
In September, the decision of the monetary policy committee to maintain the repo rate at 8.25% was not unanimous with two members voting for an increase. Central bank governor Kuben Naidoo recently announced his resignation, and he was known for having a dovish presence compared to the hawkish stance of governor Lesetja Kganyago. It remains to be seen whether monetary policy will adopt a more aggressive approach after Naidoo's departure. The monetary policy committee will decide its rates at the next meeting on 23 November. We expect rates to remain high, at least for the rest of 2023/24.
Revenue: better than worst-case scenarios but still falling short
After three years of excessive revenue collection, the government faces substantial slippage in revenue collections this year. In the fiscal year up to August, CIT revenues were down 15% y/y to ZAR 121.4bn. Personal income tax revenues increased by ZAR 5.1bn y/y in August and VAT revenues rose by ZAR 2.9bn as refunds were lower than last year. Revenue from CIT rose by ZAR 3.1bn y/y in August which is a decent performance and may point to better collection efforts on the part of SARS. The revenue outlook remains clouded however, as corporate income growth is set to weaken amid a moderation in commodity prices and loadshedding that is dampening economic activity and corporate profits. Most analysts agree that the National Treasury's revenue projections in the 2022 MTBPS were too optimistic.
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To mitigate this, SARS has begun initiating measures to improve revenue collection, focusing on stricter tax requirements for remote workers and enforcing tighter tax compliance measures across the board. Under the 2023 Draft Tax Administration Laws Amendment Bill, non-resident employers will have to register for employees' tax. SARS commissioner Edward Kieswetter said in October that due to better tax compliance enforcement there is hope that this year's tax shortfall will not be as big as anticipated. Private sector economists are predicting the shortfall to be in the region of ZAR 40bn.
Competing expenditure priorities
As the Treasury were preparing this year's MTBPS, they would've had the challenge of balancing firstly, expectations from politicians to increase expenditure in the upcoming election year, and secondly, adhering to the Treasury's objective of bringing debt down to a sustainable level while also not harming potential growth. The minister said this month that budget cuts will be moderate, below the underspending of ZAR 28bn by government in 2022/23.
The pressure on the spending envelope is significant. The treasury's initial prediction of only a 1.6% wage hike jumped to a 7.5% increase this year following wage negotiations and five months of strike action. The expected increase by 7.5% will result in compensation costs amounting to roughly ZAR 718bn for 2023/24. Treasury's projected budget for 2023/24 was ZAR 701bn, therefore signifying a shortfall of roughly ZAR R17bn.
The Social Relief and Distress Grant introduced during the peak of Covid-19 pandemic in 2020 was budgeted to end after 2023/24. Minister of social development Lindiwe Zulu said this month that government is working to extend the grant until 2026 which would give government time to finalise the upcoming basic income grant. Currently, 8.5 million people received the social relief grant, for which government spent ZAR 30bn in 2022/23.
Previous exercises within the Treasury to identify savings and funding for reprioritisation had focused on non-critical expenditure in goods and services but departments now say programmes have been picked dry and there is nothing left to cut. In the runup to the MTBPS, as fiscal metrics have deteriorated, the Treasury has hinted at the following possible options to be proposed on 1 November: reducing expenditure moderately, suspending new hires in departments, stopping contract procurement for infrastructure projects, and decreasing non-essential travel expenditure.
Given the minister's statement that budget cuts will be moderate and the ANC's reluctance to implement tax hikes, we believe the MTBPS proposals could feature significant government borrowing, which will worry investors as well as stakeholders like the IMF who are pushing for strong fiscal consolidation.
Debt in struggling SOEs
Spending pressures for the National Treasury not only appear in the form of the wage bill. SOEs continue to be a significant drain on public finances. Government has promised they will provide details on a solution for Eskom's large debt, estimated at ZAR 423bn. Eskoms's total debt is almost equal to the total national budget for education, and more than the spending on health or social development. In the 2023 Budget, minister Godongwana announced that Eskom will receive ZAR 254bn in debt relief over the next three years from the Treasury. The Treasury has already extended the first ZAR 16bn transfer to Eskom under the debt relief programme in August.
Currently ZAR 30bn is pencilled in the budget for SOEs, not including funds for Eskom, but it is becoming apparent that additional funding may be required. Transnet has asked government to take on part (ZAR 100bn) of its ZAR 130bn debt. Transnet has also requested an unspecified cash injection from the government to implement its turnaround strategy. The Treasury recently secured a USD 1bn loan (ZAR 19bn) for Eskom's unbundling and to upgrade Transnet's locomotives. The MTBPS will give an update on the debt of both SOEs.