MTBPS: Not a rosy fiscal picture with disappointing fiscal slippage

The first MTBPS under the government of national unity did not paint a rosy fiscal picture, with disappointing, although modest, fiscal slippage.

However, Jee-A van der Linde, senior economist at Oxford Economics Africa, says the MTBPS paints a realistic picture of South Africa’s financial state which continues to reflect serious risks to the fiscal outlook.

“The underwhelming MTBPS fiscal projections confirm what we already know: Treasury has very limited fiscal room to move. Consequently, we anticipate that our baseline forecasts will largely remain unchanged.

“An encouraging takeaway is government’s emphasis on pro-growth infrastructure spending and a new approach that will involve close cooperation with the private sector. Having plucked the last low-hanging fruits, such as the valuation gains in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), government’s focus seems to have shifted to boosting economic growth to improve South Africa’s fiscal outlook.”

However, he says, it will take more than the finance minister’s aspirational words to achieve these goals and a great deal more to improve economic efficiency and stem widespread government misspending.

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Solid budget with strained resources

Busisiwe Mavuso, CEO of Business Leadership South Africa, believes that the MTBPS prioritises the important areas, although with strained resources, striking a good balance between fiscal discipline and directing revenue to areas that will boost economic growth over the long term.

“This was achieved with lower-than-expected tax revenue – R22.3 billion less than expected in February, with lower projections for future years.”

She points out that the consistent adherence to fiscal discipline has been recognised internationally and remains a very important tick on the “pros” list when investors assess the country’s investment potential.

“Nevertheless, the economy continues to underperform, with National Treasury trimming its gross domestic product (GDP) growth forecast for the current year from 1.3% to 1.1%. Only economic growth can generate fiscal sustainability and social upliftment for South Africans.”

However, she says BLSA remains concerned about the risks to the fiscal and growth outlook, ranging from potential international economic and geopolitical headwinds, a higher than expected public sector wage agreement and further bailouts to “too big to fail” SOEs like Transnet, that remain.

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MTBPS was ‘pragmatic, realistic and credible‘

Prof. Raymond Parsons, economist at the NWU Business School, says given the fine budgetary line that still had to be walked by Godongwana, the GNU’s first MTBPS comes across as a pragmatic, realistic and credible strategy to again tackle South Africa’s challenges of low economic growth and high public debt.

“The MTBPS outlined a new sense of economic direction which, if properly implemented, would now make it easier over the next three years to strike the right balance between growth-enhancing measures on the one hand and stabilising the still challenging high debt-to-GDP ratio, on the other.

“The challenge to GNU policymaking is therefore to create a macro-economic environment indisputably based on the pillars of efficiency, stability, consistency and certainty, which would also resonate with the theme of South Africa’s presidency of the G20 in 2025.”

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Commitment to macroeconomic stability bolsters confidence

Mamello Matikinca-Ngwenya, chief economist at FNB and Chantal Marx, head of investments research at FNB Wealth and Investments, point out that government achieved a primary budget surplus of 0.5% of GDP in 2023/24 for the first time in 15 years.

“This mini budget arrives at a pivotal moment as South Africa’s economy benefits from a stable global environment, structural reforms, improved electricity supply and growing cautious optimism in the GNU’s leadership.

“Government’s commitment to macroeconomic stability, focus on structural reforms and infrastructure investments should improve the business operating environment, bolstering business and consumer confidence.

“With its entire value chain, the broader construction sector should find support from the prioritisation of public-sector infrastructure investment, with positive spillovers to the rest of the economy. The MTBPS affirms our view that there will be no further sovereign credit rating downgrades, but also no upgrades anytime soon.”

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MTPS fell short of market’s upbeat expectations

Isaac Matshego, Johannes Khosa and Nicky Weimar, economists at the Nedbank Group Economic Unit, say the fiscal path set out in the MTBPS probably fell short of the market’s relatively upbeat expectations.

“The unexpected downward revisions to revenue estimates illustrate that economic activity remains weak and the evolving recovery timid. Ironically, improving operating conditions due to steadier electricity supply also hurt tax revenue, dampening demand for alternative solutions sourced mainly through imports and thereby hitting import tax collections.”

They also point out that Treasury unsurprisingly struggled to contain expenditure growth due to a higher wage bill and increased debt service costs. “Consequently, this year’s budget deficit will be higher than most anticipated and the envisioned pace of fiscal consolidation will be slower than expected.

“The most encouraging message from the MTBPS is the focus on accelerating structural reforms, including the increase in infrastructure outlays. Undoubtedly, these reforms are the key to unlocking faster economic growth and job creation in the years ahead.

“Until the supply-side constraints on economic growth are lifted materially, fiscal consolidation will remain challenging, requiring continued and significant expenditure restraint. On this front, the outcome of the public sector wage negotiations will likely determine whether the government will meet today’s fiscal targets come February next year.”

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Disappointing fiscal slippage in MTBPS

Dr Elna Moolman, head of South Africa macroeconomic research at the Standard Bank Group, noted some fiscal deterioration in the MTBPS, but also that Treasury is still aiming to stabilise debt. Notwithstanding the strategy to improve the fiscal prognosis, there was some slippage in the key fiscal metrics.

“This worsening was broadly in line with our expectations in the near-term but modestly worse than we expected in the medium term. As we expected, the MTBPS encouragingly placed significant emphasis on growth and fiscal reforms, with new interventions to accelerate infrastructure spending clearly a priority for government.

“On balance, this is a growth-supportive fiscal statement and there might indeed be some upside risk to the medium-term fiscal forecasts from Treasury’s somewhat conservative economic growth estimates that remain below 2% throughout the forecast period (although the tax revenue projections are slightly less conservative).

“At the same time, there are still adverse spending risks, including from possible support required by SOEs in due course. Overall, the fiscal strategy and direction remain unchanged, but the extent of the fiscal slippage, though modest, remains disappointing.”