Gondongwana’s tough fight ahead

The South African Budget is around the corner, with Finance Minister Enoch Godongwana having to deal with weak state finances.

The Budget will be delivered on 19 February, and Investec Chief Economist Annabel Bishop expects similar fiscal projections from the 2024 Medium-Term Budget Policy Statement (MTBPS) in October.

Bishop noted that fiscal slippage has become a general trend in South Africa, with only very occasional cases of improved outlooks, such as the GFECRA account being used in 2024.

The latest gross debt-to-GDP ratio was projected to peak at 75.5% of GDP in 2025/26, which is well above the maximum sustainable debt ratio of 60% of GDP for an emerging market economy.

Bishop said that the risk is for some widening of the debt ratios.

“State expenditure for the fiscal year to date is lower as a percentage of the estimated budget outcome this fiscal year compared to last, at 72.7% vs. 74.2%, for the first three quarters of the fiscal year,” said Bishop.

“The revenue outcome to date is similar to last year at this point, of 71.2% versus 71.6%, and both years see a budget deficit of R258 billion to date,’ said Bishop.

“However, a lowering of nominal GDP would increase the gross loan debt and deficit/GDP projections.”   

Moreover, the MTBPS expected inflation of 4.6% for 2024, but South Africa’s actual inflation was 4.4%.

The lower inflation rate could mean that the nominal GDP measure could be adjusted down somewhat, lifting the fiscal ratios and risking some slippage.

The budget deficit was revised weaker for this year (2024/25) from 4.5% got 5.0%. However, further evidence of fiscal slippage for 2024/25 is likely to beyond 5.0%

“Although the MTBPS’s growth forecast is nearer ours, at 1.7% vs. 1.8%. Much will depend on the state’s GDP and CPI projections,” said Bishop.

“Overall, for the Budget, state finances are not strong, and this weakness, combined with better-than-expected inflation but lower-than-expected GDP outcomes, means further fiscal slippage remains a risk.

Potential announcements

Although the State of the Nation Address (SONA), Bishop said that its typical blandness supports an unchanged medium-term budget.

When it comes to policy announcements, Bishop said that the inflation targeting issues may be mentioned in the budget.

Although the National Treasury sets the inflation target, the Reserve Bank is tasked with achieving the target.

The current target ranges from 3% to 6%, with the 4.5% midpoint used to anchor interest rate decisions.

The Reserve Bank has regularly called for a lower inflation target in the country, stating that it will improve the nation’s competitiveness.

National Treasury, on the other hand, is worried about the potential effects that could ensue on the economy and households.

When it comes to other things to look out for in the budget, the Bureau for Economic Research also noted that the Social Relief and Distress grant could soon be extended.

A recent court ruling said that the affordability of the grant from a fiscal perspective cannot be the reason that certain people who cannot support themselves are excluded.

This could see the number of qualifying recipients rise from the 10.5 million people currently budgeted for to about 18.3 million, meaning that an additional R35 billion per year will be needed to afford it.

Moreover, the BER added that the government has offered a 5.5% increase in the wage offer for public sector workers, which is above the budgeted increase.

Unions are still looking at the proposal and it is hoped that a decision can be made soon.