Why South Africa has investors on edge this week

 ·28 Aug 2023

Capital markets are on edge over South Africa’s deteriorating fiscal outlook, say economists at the Bureau for Economic Research (BER), with government data on revenue expenditure out later this week likely to be of particular interest to investors.

National Treasury is due to release its main budget data for July on Wednesday (30 August), with finance group Absa expecting a main budget deficit of R123.7 billion to be announced.

Market consensus on the deficit is around R123 billion, versus a bigger R130 billion deficit in July 2022.

According to Absa, a print in line with this forecast would leave the 2023/34 fiscal year-to-date main budget deficit at R171 billion, compared with the deficit of R118 billion over the same period in 2022/23, pointing to a massive deterioration of South Africa’s financial position.

This comes as the country faces the other part of its “twin deficit”, which will also come into focus this week when the South African Revenue Service (SARS) publishes the July merchandise trade data on Thursday (31 August), Absa said.

The final print for this figure is varied, with Absa forecasting a small surplus of R2.7 billion versus a R3.5 deficit in June, due to “strong seasonal factors”.

Market consensus is for a smaller R800 million surplus; however, economists at Nedbank anticipate a trade deficit to remain.

“We forecast a narrower trade deficit of around R1.4 billion in July from R3.5 billion in June as exports rebounded faster than imports over the month following seasonal drops in June,” Nedbank said.

“Overall, export performance remained contained by subdued global demand, low commodity prices, and persistent power shortages. At the same time, the burning of goods trucks on some of the major routes also likely impacted shipments.”

According to economist Dawie Roodt, South Africa’s deficits are lining the country up for a world of hurt.

Roodt said that South Africa’s fiscal deficit for this year would exceed the budget set by finance minister Enoch Godongwana by some margin and that the country will soon find itself in a significant debt trap.

“South Africa’s fiscal deficit for 2023 is set to be between 6% and 6.5% of gross domestic product (GDP), much higher than the minister’s expected 4%,” Roodt said.

Roodt expects the country’s debt to increase to 75% of GDP by the end of the year and reach 80% by the end of 2024.

South Africa currently spends 20% of tax revenue on servicing debt – this debt service cost crowds out other much-needed expenditures, crippling the government’s ability to invest in essential sectors like healthcare and education.

Roodt gave a few  reasons for the growing fiscal deficit:

  • The salary bill for civil servants is larger than budgeted because they received above-inflation increases. This is set to continue with an election year in 2024.
  • The government gave more money to failing SOEs than expected. This will continue, especially with the state taking over a large part of Eskom’s debt.
  • South Africa’s tax collections are under pressure because the economy is not growing.
  • Income from mining is declining because of a downturn in the commodity cycle and problems with South Africa’s rail and port services.

Farzana Bayat, portfolio manager at Foord Asset Management, noted that, in 2006, the country’s total debt was a modest R500 billion. By 2011, this had doubled to R1 trillion before quadrupling to R4.7 trillion by 2022.

It is expected to approach R6 trillion by 2025, she said.

According to Bayat, the only way out is through high growth (unlikely), inflation (probable), drastic curtailing of government spending (politically unpalatable going into elections), or increasing taxes (unsustainable).

Read: South Africa is in deep trouble

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