South Africa: MTBPS surprises with deficit slippage, debt stabilization at higher levels
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
Finance minister Enoch Godongwana?delivered ?the Medium-Term Budget Policy Statement (MTBPS) on Wednesday (Oct 30). This is the first MTBPS presented by the government of national unity (GNU). Even though there is no major bad news, there is nothing much to be excited about either, which could serve as a bit of a disappointment, in our view. The finance minister had to moderate the GDP growth forecast this year and to announce some slippage on the fiscal targets. Even though prospects are said to be improving in the second half of this year, this has yet to materialize into growth and revenue.
Macroeconomic outlook
The National Treasury has revised its GDP growth projection to the downside. The economy will expand by 1.1% in 2024 against projections for 1.3% growth in the 2024 Budget Review. The correction, however, is relatively modest and the outlook has started to improve in the second half of the year, according to the National Treasury. GDP growth will accelerate but remains relatively muted at about 1.7% in the next two years, which is in line with the projections in the 2024 Budget Review. The main source of growth will come from household consumption and from a surge in investments. The government projects 1.8% growth in household consumption next year and a sharp rebound in gross fixed capital formation by 4.7% (after a decline of 2.5% expected in 2024). Over the coming two-three years, investment growth will stem from the expected recovery in the global economy, the less restrictive monetary policy, supportive commodity prices and the boost from private sector investments in energy.
The National Treasury placed a substantial focus on the investment in infrastructure and the structural reforms that are directly tied to South Africa's growth prospects. It listed the areas of reform focus for the government, which are not new and are incorporated in the structural reform blueprint Operation Vulindlela. The main focus of reform will fall on Eskom and Transnet which dominate on the energy and transport markets, respectively as well as visa regime changes and investments in water security.
In our assessment, the growth projections are realistic and the reforms that are currently being implemented should support confidence and promote a more favourable backdrop. However, the easing of structural constraints will take time to lift growth substantially and meaningfully to improve national employment. Overall, the growth story is not really exciting and risks also abound.
Fiscal Revenue
Limited economic growth is the main hindrance to generating stronger revenues. Disappointingly, the National Treasury has trimmed down its revenue projections over the medium term. The Treasury is projecting a gross tax revenue shortfall of ZAR 22.3bn in 2024/25. The correction for the worse reflects ZAR 13.4bn shortfall of fuel levy revenues, ZAR 13bn shortfall of import VAT and ZAR 9.7bn correction in the personal income revenue stream. Some of the underperformance will be offset by corporate tax revenues which are forecast to raise ZAR 11.7bn more than previously expected.
Main budget revenues have been corrected to the downside by ZAR 31.2bn in the next two years due to the trimming of expected gross tax revenue. The National Treasury said that import VAT collections have been revised lower due to an expected decline in the imports related to renewable energy.
领英推荐
Fiscal Expenditures
On the expenditure side, the National Treasury is expecting a slippage relative to the 2024 Budget Review estimates. Non-interest spending has been revised higher in the main budget by ZAR 32.4bn over the next two years, reflecting ZAR 11bn additional spending allocated for early retirement, ZAR 3.2bn for government's contribution to the reduction of SANRAL GFIP debt in 2025/26 and ZAR 3.5bn carry-through costs for military operation in the DRC. Nearly 60% of government spending is allocated to supporting the social wage. The revised spending on the compensation of employees has increased to ZAR 761.4bn in 2024/25 and ZAR 798.3bn in 2025/26 from ZAR 754.2bn and ZAR 788.7bn estimated in the 2024 Budget Review.
Fiscal deficit
The main budget deficit is projected at ZAR 355.6bn in 2024/25, comprising 4.7% of GDP, slightly higher than in 2023/24. This forecast represents a slippage compared to ZAR 320.9bn target (4.3% of GDP) set in the 2024 Budget Review. Broadly the same amount of slippage (0.4pps of GDP) is transferred also to subsequent years. The main budget deficit is still forecast to decline to 4.3% of GDP in 2025/26 and 3.8% of GDP in 2026/27 and 3.4% of GDP ultimately in 2027/28. However, the National Treasury is basically postponing the start of the consolidation path.
Primary surplus and debt stabilization
Despite the slower-than-expected revenue growth, the state is on track to achieve primary surpluses in 2024/25 and over the medium term. In a positive achievement, the National Treasury was able to achieve the first primary surplus in 15 years in 2023/24 in the amount of 0.5% of GDP. However, the surpluses will arrive below the previous projections in the 2024 Budget Review and will comprise 0.4% of GDP in 2024/25, 0.9% in 2025/26 and 1.4% and 1.8% in the following two years, instead of 0.8% to 1.8% in 2024/25-2026/27 previously expected. The fiscal deficit slippage is a negative development as it affects the gross loan debt trajectory which is closely watched by the rating agencies.
Gross loan debt
Gross loan debt has been projected at ZAR 5,622bn at the end of 2025/26 and will exceed the ZAR 6tn mark as soon as next year. The gross loan debt is exceeding the estimates of the 2024 Budget Review and although it does peak in 2025/26 as previously expected, it stabilizes at higher levels. It is also worth noting that the fiscal rule will not be implemented in the next budget but will be discussed in a policy document in March 2025. The fiscal rule was recommended by the IMF as a means to help restrain borrowing the growth of the public debt stock. The ANC said earlier this week it did not support a debt ceiling rule as a focus on growth seems to be placed.
Conclusion
As the economy remains weak this year, the government expects more revenue shortfalls, although not as severe as in the preceding two years. Nonetheless, the National Treasury expects a slippage against the budget deficit target in 2024 Budget Review. The government seems to be counting on better growth next year to lift revenue collection which is still underperforming this year, according to the new projections. However, the National Treasury does not project any major spending cuts to offset this weakness. It remains to be seen if the structural reforms yield faster growth and more revenue. However, vulnerability to external risks remain and business confidence which started to recover will translate to actual investment only if reforms are implemented with resolve.