By Casey Delport
On 22 February, South Africa’s Minister of Finance Enoch Godongwana will deliver the 2023 Budget Speech to the National Assembly in Parliament.
This year’s budget will be tabled amid an even more challenging economic and socio-economic environment than previous iterations, many of which are due to decades-long policy inertia, the impact of the Covid-19 pandemic and the implications of Russia’s war in Ukraine. Accordingly, the focus will likely be on economic growth and revenue revisions.
At the same time, expenditure pressures have increased as the government grapples with the energy crisis and weak economic growth effects, such as the need for an extension of the Social Relief of Distress (SDR) grant.
At the end of January, the SA Reserve Bank (SARB) lowered its 2023 SA growth forecast to 0.3% YoY. National Treasury (NT) is thus likely to move its 2023 forecast for real GDP growth to below 1.0% YoY and drop its GDP growth projections for 2024 and 2025.
However, it is important to bear in mind that trimming the already forecast nominal GDP values for this year and the next few (on the part of the NT) too drastically would not be wise amid an increasingly uncertain economic environment, as this would damage fiscal ratios by pushing them significantly higher, weakening international credit rating assessments.
Nonetheless, a combination of solid expenditure control and robust tax collections suggests the main FY22/FY23 budget deficit could ultimately print at 4.6% of GDP, below the 4.9% target in the medium-term budget policy statement (MTBPS). For FY23/FY24, however, we forecast that a combination of downside revenue pressures and upside spending risks will cause the deficit to widen.
Nevertheless, there is a growing downside risk to the medium-term revenue growth forecasts, with longstanding concern about weak trend growth aggravated by the electricity crisis.
In addition, loadshedding will weigh on company profits (and, in turn, company income tax revenues), given the increased cost of implementing backup electricity. These concerns will likely also weigh on bonds and negate the previous improvement in sovereign rating assessments, notwithstanding clearer indications of the government’s commitment to fiscal consolidation.
We do not expect any tax hikes this year, but there should be ongoing support for revenue collections from the SA Revenue Service’s (SARS) efficiency gains.
Lastly, we do not anticipate a complete Eskom debt deal to be unveiled in the budget, which will naturally lead to a level of market disappointment.
Overall, scepticism remains about whether there is adequate traction with policy reform to sufficiently lift trend growth to ensure debt stabilisation amid elevated social spending needs. This is because SA’s slow and largely poor policy implementation has been the key determinant of our weak economic growth rate over the past decade or so, thus exacerbating unemployment and inequality.
As such, after years of costly expenditure on various state-owned enterprises (SOE) reforms (and subsequent poor results), markets fear additional cost and debt for the state and a deterioration of state finances, negatively impacting SA’s bond market and thus weakening the rand.
Regardless, amidst all these factors, and in anticipation of the upcoming tabling of the 2023 Budget, the points highlighted below form part of our wish list, or set of ideals, for this year’s Budget:
- Taking action against those implicated in wrongdoing at the Zondo Commission.
- No budget reduction for the National Prosecuting Authority (NPA) or, better yet, allocating more money to the NPA and the Special Investigating Unit (SIU) to fight rampant corruption
- A demonstration of the government’s intention to follow a path of fiscal consolidation with difficult actions rather than simply words.
- A credible plan that brings debt accumulation under control and where debt levels begin to come down rather than escalating at a slower pace.
- A demonstration of additional measures to improve the ease of doing business in SA.
- A credible turnaround plan for Transnet, with a priority emphasis given its central, critical role in the greater SA economy.
- Further details surrounding potential liabilities of the Road Accident Fund (RAF), as well as other SOEs, which are currently in distress, including Denel, the Land and Agricultural Development Bank of SA (Land Bank), the SA National Roads Agency (SANRAL), etc.
- Detailed plans to address the financial distress of municipalities around the country.
- The presentation of feasible growth targets that reflect the current economic reality of the country.
- Clarity surrounding the future of the SRD grant - will it finally be formalised into a basic income grant? Will the benefit level be raised?
- Further details on tax incentives for households and businesses to install self-generation to cope with loadshedding.
- A clear outline of the reprioritisation of funding under the latest national state of disaster and what it entails.
Whether any of the above mentioned wish list items will come to fruition remains to be seen. Plenty of other fiscal-related issues also need to be addressed, and this list is by no means exhaustive.
Interestingly, the above mentioned points are relatively unchanged from the wish list we released prior to the 2022 February Budget (Anchor’s 2022 budget wish list, dated 20 February 2022), indicative of the many uncertainties and unanswered questions in SA’s fiscal space.
Overall, reining in new expenditure pressures is key, as is making savings, avoiding wastage, inefficiency and inappropriate spending, focusing on economic growth-creating initiatives, and spurring rapid repair of the electricity sector.
Casey Delport is an Investment Analyst: Fixed Income at Anchor Capital
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