Financial markets welcome SA’s improved fiscal position

Finance Minister Enoch Godongwana delivers the Medium- Term Budget Speech 2022. Picture: Phando Jikelo/African News Agency (ANA)

Finance Minister Enoch Godongwana delivers the Medium- Term Budget Speech 2022. Picture: Phando Jikelo/African News Agency (ANA)

Published Oct 27, 2022


The financial markets have welcomed South Africa’s improved fiscal position as the rand dipped below the R18-mark to the dollar for the first time in three weeks.

The rand yesterday was 0.23% stronger at R17.97 against the greenback, its highest level since October 4 and better than its R18.20 close on Tuesday.

The JSE All Share index also extended gains to close 1.9% higher at 67 103 index points as commodities-linked stocks and Naspers rallied.

Finance Minister Enoch Godongwana yesterday tabled an optimistic Medium-Term Budget Policy Statement (MTBPS) with improved fiscal and debt outlook helped by buoyant revenue collection.

FNB head of investment research Chantal Marx said the financials indices had spiked during the speech, turning positive after having traded in the red for most of the day.

“This was a steady budget from a market perspective, striking a decent balance in being equity and bond friendly,” Marx said.

“The rand held firm, bond yields came down across the curve and the equity market held its own.”

Sensing the coming storm of an impending recession next year, Godongwana tabled a fiscally prudent medium-term budget, flagging smaller deficits in the next three years and debt stabilising at a lower level thanks to higher-than-expected revenues.

Revenue collection has exceeded projections across most major tax categories since the 2022 Budget, with the gross tax revenue estimate for 2022/23 revised up by R83.5 billion to R1.68 trillion.

Godongwana lamented that many risks he outlined in February such as rising inflation, the lingering effects of the Covid-19 pandemic, and tightening financial conditions had materialised.

He said the slowing of global growth and higher inflation if the Russia-Ukraine war escalated and a further decline in Chinese economic growth were significant risks in the global environment.

“In this context, small open economies like ours need to be especially careful and have solid fiscal buffers in place to weather the coming storm,” he said.

As a result, Godongwana lowered gross domestic product (GDP) growth projections until 2024, in part a reflection of a global slowdown, high inflation and recurrent power cuts in the country.

“We now expect real GDP growth of 1.9% in 2022, compared with an estimate of 2.1% in February,” he said.

“Over the next three years, the economy is expected to grow at an average of 1.6%.”

Moody’s Investors Service senior credit officer, Aurélien Mali, said the MTBPS reaffirmed the country’s commitment to fiscal consolidation, but economic growth projections were still too optimistic.

“Thanks to improved revenue collection, the government plans to reprioritise spending towards security and infrastructure, in order to support long-term economic growth.

“However, Moody’s forecast the economy to grow between 1%-1.5% over the next few years in part due to infrastructure challenges.”

Godongwana said consolidated government spending was expected to exceed R2.2trl this year and would rise to R2.5trl in 2025/26.

He projected a consolidated fiscal deficit of 4.9% of GDP in the 2022/23 financial year compared to 6% forecast in February, declining to 3.2% of GDP by 2025/26.

The government debt is projected to be more than R4.7trl in the current financial year, compared to R627bn in 2008/09.

Debt-service costs will average R355.2bn per year over the medium-term expenditure framework while markets were becoming more volatile due to slowing global economy and rising inflation.

“The result is that the debt-service costs are estimated to be R5.9 billion higher in 2022/23 than what we thought at the time of the February budget,” he said.

Godongwana said the gross government debt should thus stabilise at 71.4% of GDP this year, two years earlier and at a lower level than projected in February.

However, Matrix Fund Managers economist Carmen Nel said this was an overly positive budget update amid significant uncertainty.

“We think there may be too much optimism embedded in these projections. This may be merely a placeholder budget, albeit on the bullish side of the risk distribution, given significant events between now and the February 2023 Budget Statement,” Nel said.

“The presentation of the current fiscal year was more realistic. The market may find it difficult to believe that the government will be able to narrow the deficit to 3.2% of GDP by 2025/26 financial year.”