All eyes on Enoch Godongwana’s maiden mini budget this week
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Finance minister Enoch Godongwana will have to play open cards to convince investors and ratings agencies that South Africa’s finances are stable amid some of the worst economic indicators in decades.
Unemployment has worsened to record levels, with more than 7.2 million people of working age officially jobless as the Covid-19 pandemic culled many businesses.
Eskom’s ongoing power cuts are also constraining economic growth, which could possibly push South Africa’s sovereign debt deeper into sub-investment territory.
Godongwana will on Thursday table his maiden Medium-Term Budget Policy Statement (MTBPS) after his eccentric predecessor quit the post in a huff when trade unions shot down his austere budgets.
The MTBPS sets the tone for the country’s fiscal policy and the government’s spending priorities for the next three years, and reveals projections of curbing rising debt levels.
The country’s gross loan debt is projected at a still elevated 70 percent of gross domestic product (GDP) for 2020/21, versus the 80.3 percent of GDP forecast in the February 2021 Budget.
The budget deficit for 2021/22 is expected to be projected near -7.5 percent of GDP, down from a projection of -9.3 percent as fiscal conditions improve.
Godongwana will need to focus on business-friendly policies that stimulate sustainable economic growth and boost confidence to ensure that South Africa avoids real fiscal difficulty.
Citadel chief economist Maarten Ackerman on Friday said the MTBPS should prioritise economic growth policies to get South Africa out of its debt spiral.
Ackerman said the economy had rebounded more positively over the past year than had been expected, partly thanks to the reopening of the global economy supporting strong exports from the local commodities and agricultural sectors.
“This doesn't mean that we are out of the woods yet, it just appears far better in comparison to the worst of the pandemic,” Ackerman said.
“What one hopes to see is whether the minister is going to be prudent and use this opportunity to ‘bank’ some of the benefits that we have seen, because we are still in a very tight fiscal position.”
Economists expect South Africa to clock a revenue overrun in excess of R100 billion in the current fiscal year, with some estimating it as high as R160bn.
This revenue overrun would be underpinned by the combination of a pandemic-induced low base in 2020, a boost from elevated commodity prices and higher export earnings, and the general economic recovery from the further easing of lockdown restrictions.
However, the government has already begun spending this as there are several big-ticket social commitments on the cards.
The National Treasury is considering various options to address the widening poverty gap, including support for the economic recovery and employment creation.
This includes the introduction of a more permanent expansion of the social security system.
But the above-budgeted public sector wage settlements also continue to pose an upside threat to government expenditure.
These have been some of the main concerns for major ratings agencies about South Africa’s outlook, beyond Eskom’s energy crisis, in spite of expected 5 percent economic growth due to low base effects.
Momentum Investments economist Sanisha Packirisamy said the country’s rating outlook could, however, worsen even if fiscal and debt ratios were likely to show a notable improvement.
“Debt remains at elevated levels and the pace of reform efforts remains modest against a backdrop of pedestrian growth,” she said.
“Given sticky medium-term fiscal and growth risks, we believe the bias to SA’s sovereign rating outlook is to the downside in the medium term, despite an improved near-term outlook.”
This will weigh on Godongwana’s already heavy burden and may push him to not deviate from the current fiscal consolidation path, at least ensuring stable economic growth.
With economic growth remaining uneven and protracted, real GDP is expected to only return to the pre-pandemic level in the third quarter of 2023.
FNB economist Mamello Matikinca-Ngwenya said they expected the MTBPS to project slightly stronger growth for this year of between 4.5 to 5.4 percent.
“However, we expect negligible forecast revisions for the outer years. We also expect the time frame for the return to 2019 levels to be brought forward,” she said.
BUSINESS REPORT ONLINE