MTBPS: Watch out for these fiscal pressure points – economists

Economists are already trying to determine the fiscal pressure points Finance Minister Enoch Godongwana will have to include when he delivers the Medium-Term Budget Policy Statement (MTBPS) on 30 October.

The establishment of the government of national unity (GNU) created a framework for enhanced political stability, fiscal responsibility and renewed optimism regarding economic reforms in South Africa.

Sanisha Packirisamy, chief economist at Momentum Investments Group, says the GNU is prioritising inclusive, sustainable and accelerated economic growth and key reforms, such as Operation Vulindlela, and will continue to play a central role in improving government efficiency and simplifying procedures to create a more business-friendly environment.

“The GNU is committed to prudent financial management, focusing on debt stabilisation and sustainable expenditure to address long-standing structural deficits, which is crucial for restoring fiscal stability.“

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Growth will likely be adjusted higher in MTBPS

She says since the last economic forecast update by the National Treasury in February, growth in the medium-term will likely be adjusted higher on the back of an improvement in South Africa’s network industries (electricity in particular) and early pension withdrawals related to the two-pot retirement system reforms.

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

Packirisamy says Godongwana is expected to focus on these five fiscal pressure points:

• Pressure Point #1: Picture beyond the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) profits
• Pressure Point #2: Public pay packet pressures on a pinched purse
• Pressure Point #3: Propping up public entities with persistent financial pressures
• Pressure Point #4: Potential financing pathways for plugging the budget gap
• Pressure Point #5: Prospective risks to the sovereign rating prognosis.

#1: Beyond the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) profits

Packirisamy says they expect the MTBPS to follow the trajectory set out by the 2024 national budget in February, reinforcing the goal of achieving primary budget surpluses to stabilise South Africa’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 forecasts.”

She says corporate tax collections could provide an uplift, particularly with December being a crucial month for revenue intake, while personal income tax collections may receive a boost from the implementation of the two-pot retirement system in September this year.

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#2: Public pay packet pressures on a pinched purse

On 1 April last year, government and labour agreed on a two-year wage deal, granting workers a 4.7% increase that effectively resulted in a 7.5% increase for the previous financial year, with an inflation adjustment planned for the current financial year, Packirisamy points out.

However, she says, on 1 October, unions representing 1.3 million government employees rejected the employer’s offer of a 3% increase for the next financial year and asked for 12%. “This far exceeds the 4.5% increase outlined in the February budget, which could push the total compensation bill to approximately R754 billion.”

Budget cuts already led to vacancies in critical roles in sectors including healthcare, exacerbating the decline in service delivery as the government strives to contain the public sector wage bill, she says.

#3: Propping up public entities with persistent financial pressures

Although Eskom’s Generation Operational Recovery Plan reached a significant milestone, marking the longest period of uninterrupted power supply in five years, RMB Morgan Stanley highlights that in the absence of power outages, Transnet has become the largest drag on growth over the past year.

It is estimated that Transnet has reduced GDP growth by one or two percentage points. Packirisamy points out that Transnet’s ability to invest in expansion is hampered by limited cash flow, rising debt servicing costs on a R130 billion debt pile and a steep debt maturity schedule, leaving most of its spending focused on maintenance, rather than expansion.

While debt relief for Transnet similar to Eskom’s debt transfer could facilitate higher capital expenditure, further government support is only expected in the next fiscal year. This is expected to affect government’s budget deficit and debt-to-GDP ratio.

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#4: Potential financing pathways for plugging the budget gap in MTBPS

Fiscal performance is expected to largely align with the February budget estimates, she says. “The R100 billion in GFECRA cash alleviated funding pressure and therefore we do not anticipate any major changes in domestic issuance in the near term.”

Packirisamy says in addition the projected fiscal slippage is likely to be less severe than previously forecast and pressure on debt redemptions has eased due to a high uptake of bond switches. However, debt service costs nevertheless continue to grow and crowd out other public spending in the economy.

#5: Prospective risks to the sovereign rating prognosis

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

“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.”

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Pressure on Treasury and GNU for a good news budget in MTBPS

Mpho Molopyane, chief economist at Alexforbes Investments, points out that this MTBPS will be the first ‘mini’ budget tabled since the formation of the GNU and will in itself put pressure on Treasury and GNU partners to present a good news budget.

“Luckily, this should not be a difficult task as spending pressures seem relatively contained, with Treasury having a tight grip on expenditure. Moreover, a relatively stronger Rand year-to-date and compression of bond yields should offer some savings in the form of lower debt service costs.”

On the revenue side, while gross tax revenue is likely to undershoot February’s estimates, the windfall from two-pot retirement system withdrawals and GFECRA transfers from the South African Reserve Bank should ease financing pressures, he says.

“Overall, we expect Treasury to continue pursuing fiscal consolidation, with the aim of stabilising debt over the forecast horizon. An adoption of a fiscal anchor (be it a debt-stabilising primary surplus or debt-to-GDP ratio) would increase the credibility of the budget and boost investor sentiment.

“This could see SA Inc. stocks and bonds continue to rally. A key caveat is that the post-MTBPS positive sentiment could be short-lived should the outcome of the US elections lead to a risk-off environment.”