MTBPS: Cold shower or good news for growth?

Was Wednesday’s MTBPS a cold shower of reality, or did it also contain good news for economic growth? Did finance minister Enoch Godongwana pour cold water on all the good news the market was expecting about an improving economy after the formation of the government of national unity, improved energy security, and lowering inflation?

Maarten Ackerman, chief economist at Citadel, says from the minister’s opening sentence on the domestic outlook, the Medium-Term Budget Policy Statement (MTBPS) was a reality check on the positive expectations before this announcement.

“There were no short-term wins in any of the numbers. The Rand weakened and bonds sold off immediately because the budget is based on the reality on the ground and not just positive thinking. However, we cannot fault the budget. The process has been thorough and world-class.”

Godongwana announced a forecast for real gross domestic product (GDP) growth of only 1.1% in 2024, which was lower than the estimate of 1.3% he announced in February. Over the medium term, growth was forecast to average 1.8%, with the best-case scenario being 2.5% and the worst-case scenario potentially reaching a low of 0.5% growth.

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MTBPS: four growth pillars

To improve the situation and achieve higher inclusive growth, Godongwana said the country must focus on four growth pillars: macroeconomic stability, structural reforms, growth-enhancing infrastructure and improved state capability.

Ackerman believes that economic growth reform was “contingent on structural reforms”. “The big elephant in the room is still the public sector wage bill and, in the MTBPS we were told we rank third highest in the world at about 14% of GDP, whereas the global average is only 10%.

“They also made the point that we are much higher than the rest of the world on general government employment levels, and therefore it is good news to hear that the government is offering about 30 000 public servants early retirement packages.

“Unfortunately, in the short term, it feeds into the government’s high debt at a cost of R11 billion, but we appreciate that it is a difficult task, and at least they are taking big steps to lower the wage bill.”

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Government debt according to the MTBPS

Speaking about government debt, the minister announced that South Africa’s debt-to-GDP ratio sat at an “unsustainable” 75.5%.

“The only reason we are still below 80% is thanks to the monetisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) in February, which took away some of Treasury’s funding pressures.

“On the positive side, we did achieve a positive primary balance, but that excludes debt payment costs, which we cannot just ignore as it is now more than 20% of budget expenditure,” Ackerman says.

He finds it very concerning that South Africa fared the worst out of 94 emerging market economies in terms of the country’s debt trajectory, with the percentage of debt-to-GDP as well as the country’s debt servicing costs far higher than all the other emerging markets.

Godongwana shared the good news that the Financial Action Task Force (FATF), the international body that greylisted South Africa, found that the country either largely or fully addressed 16 of the 22 action items on its checklist.

However, Ackerman cautions that the remaining items, which include the need for more sustained prosecutions of high-profile financial crimes, were the hardest items on the list. “It is highly unlikely that South Africa will tick all the boxes it needs to before the FATF’s next assessment in February 2025. It may take another year to get off the greylist.”

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Infrastructure spending in MTBPS was good news

He found more good news in Godongwana’s reference to expanded infrastructure spending. “Infrastructure spending is always a great injection into the economy. Half of what we are spending on is needed, like improving our ports and rail system, but there is more we must do in terms of structural reforms to get the economy back to capacity growth.

“This is why it was good news to see that Project Vulindlela added three new items to its second phase, including smart cities, digital public infrastructure and strengthening local government’s ability to deliver basic services.”

He also thinks local government debt relief, which would enable municipalities to pay their debts to Eskom and the Water Board, was a positive step forward, “but the numbers are still enormous.”

“It was very prudent of Treasury not to be too optimistic, because they have to take global headwinds into account, as well as many remaining local structural issues that will take some years to address. Looking at Godongwana’s current budget above capacity, economic growth is only likely in years to come.”

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Good news in MTBPS projection of economic growth above 2%

However, Blessing Utete, managing executive of Old Mutual Corporate Consultants, liked the outline in the MTBPS of an “upside scenario” where South Africa’s economic growth could rise above 2% from 2025, compared to the current baseline estimate of 1.7%, according to the National Treasury’s latest release.

“This optimistic outlook hinges on increased capacity from ongoing energy investments and the resolution of issues within the country’s port and rail sectors.”

He says this potential boost in growth brings renewed hope for the job market. “Employment is the foundation for retirement savings and job creation is the starting point for improving the nation’s retirement outcomes.

“Without jobs, people lack the income necessary to save effectively for their future. By prioritising job creation and economic growth, South Africa can enhance savings rates and improve overall retirement outcomes, which are vital for the financial security of its citizens.”

Utete says by realising the MTBPS’s upside growth scenario, Treasury could help usher in a period of job creation and economic stability that would lay the foundation for a more robust retirement system, strengthening South Africa’s future and securing financial independence for its citizens.