5 major pressure points for Godongwana next week

Finance Minister Enoch Godongwana will deliver the medium-term budget policy statement (MTBPS) later this month. Momentum Investments has highlighted five pressure points for the Minister.

Momentum Investments said that the formation of the Government of National Unity (GNU) has created a framework for improved political stability, fiscal responsibility and renewed optimism concerning economic reforms in South Africa.

Since the February 2024 Budget, medium-term growth is likely to have increased due to the improvement in South Africa’s network industries, primarily Eskom, and the early withdrawals from pensions following the creation of the two-pot retirement system.

“Despite displaying one of the sharpest rates of deterioration in the debt-to-gross GDP profile, Treasury’s February 2024 estimates highlight a faster-anticipated contraction in the SA government’s budget deficit ratio and an earlier stabilisation in the debt ratio relative to developed market and emerging market composites,” said Momentum.

The group expects the MTBPS to be a table on 30 October 2024 to focus on the following five fiscal pressure points:

• Pressure Point 1: Beyond GFECRA

In the 2024 Budget, National Treasury and the South African Reserve Bank decided to use the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) profits to counter any budget shortages.

A balance of R150 billion will be paid to the National Treasury in tranches of R100 billion (2024/25), R25 billion (2025/26) and R25 billion (2026/27).

Momentum said that it expects the MTBPS to follow the trajectory seen in the 2024 national budget in February. This reinforces the goal of achieving primary budget surpluses to stabilise the nation’s debt-to-GDP ratio.

“Current tax revenue trends suggest a potential shortfall of between R10 billion and R20 billion, while expenditure is likely to remain close to or slightly below Treasury’s February 2024 forecasts,” said Momentum.

• Pressure Point #2: Public pay packet

In April 2023, labour and the government agreed on a two-year wage deal. The deal granted workers a 4.7% wage increase, which effectively resulted in a 7.5% raise for FY 2023/24, with an inflation-linked adjustment planned for FY 2024/25.

“However, on 1 October 2024, unions representing 1.3 million government employees rejected the employer’s offer of a 3% salary increase for FY2025/26, countering a 12% demand.”

“This far exceeds the 4.5% increase outlined in the February 2024 national budget, which would push the total compensation bill to approximately R754 billion.”

“Budget cuts have already led to vacancies in critical sectors, such as healthcare, which has exacerbated the decline in service delivery as the government strives to contain the public sector wage bill.”

Looking beyond public sector wages, there are still debates over finding a long-term solution to the now R370 social relief of distress grant rather than simple temporary extensions.

• Pressure Point #3: Bailouts

In recent years, the National Treasury has had to pop up public entities with persistent financial pressures.

Transnet’s ability to invest in expansion has been hampered by its limited cash flow, rising debt service costs on an R130 billion debt pile, and steep debt maturity schedule.

“As a result, most of its spending is focused on maintenance rather than expansion.”

Treasury has previously rejected Transnet’s calls for a bailout, with it tightening the purse strings after giving embattled state-owned comapanies, mainly Eskom, over R300 billion in bailouts since 2020.

• Pressure Point #4: Plugging the budget gap

Fiscal performance is widely expected to align with the February 2024 budget estimate.

“The R100 billion in GFECRA cash has alleviated funding pressure, so we do not anticipate any major changes in domestic issuance in the near term.”

• Pressure Point #5: Risks to the Sovereign Rating Prognosis

The prospect of fiscal consolidation under the GNU alongside the ongoing reform efforts in South Africa could be enough to shift the neutral/stable outlook on the country’s sovereign rating to positive in the first half of next year.

“However, a formal upgrade is unlikely to be seriously considered until late 2025 or early 2026, as rating agencies typically require a proven track record of reform implementation and clear evidence that these efforts are driving sustained growth.”

In its most recent rating of South Africa, ratings agency Fitch says that government debt/GDP will likely grow and that the introduction of the National Health Insurance (NHI) poses severe risks to public finances.

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