South African Budget is Tabled

There are many important developments from South Africa (SA) this week with January’s inflation announced but perhaps more importantly their government’s budget was tabled.

Let us start with the inflation figure. South Africa's inflation for January 2024 stood at 5.3%, which is slightly higher than December's 5.1%. The items that contributed the most to inflation over the last year were food and non-alcoholic beverages which rose by 7.2%, health care by 6.5%, and housing and education which both rose by 5.7%. However, the biggest increase came from hotels, cafés, and restaurants with price increases of 8% – a strong indicator that the tourism sector is getting back on track. Transport costs in SA have only increased by 4.6% over the last year on the back of fuel price reductions in the last 3 months.

The higher inflation will surely also significantly reduce the expectation of lower interest rates at the South Africa Reserve Banks's next meeting and inflation will first have to continue trending lower before we can expect interest rate cuts.

Then as mentioned, the SA Finance Minister, Mr Enoch Godongwana, tabled SA's budget which, looking at the slightly stronger ZAR and lower bond rates, was well received in the market. The minister spoke about the country's current economic situation and announced their growth expectations, the massive debt burden, and certain tax increases.

He expects revenue to grow by 6% year-on-year to R2 trillion and limit their expenditure to an increase of only 4.4%, which is somewhat optimistic. They anticipate that the budget deficit will increase from its current 4% to 4.9% in 2025. This means that their debt burden will only increase further which will increase the cost of servicing the debt by an additional R16 billion, bringing the amount to a massive R356 billion for the year. This cost now makes up more than 20% of the total budget and that alone is more than what is spent on social protection, health, or homeland security.

The big concern, however, is the conditional liability provisions that have been made. Guarantees to state institutions alone are R1 trillion, consisting of debt from institutions like Eskom which stands at R350 billion, and Road Accidents Fund which stands at R370 billion. Of further concern is the fact that the government will for the first time withdraw money from the Central Bank's Gold and foreign exchange rate contingency reserve fund. The fund is the profit from foreign reserves since SA's democracy and is R507 billion strong. R150 billion will be utilised to plug some fiscal holes.

Then also the normal sin tax is raised and a few more tax increases will be implemented with no scale adjustment for individual tax scales. The hope with the budget is that they will stay within fiscal constraints to prevent their debt from getting further out of hand.