MTBPS round up: Godongwana offers a realistic, but vulnerable fiscal picture for South Africa, says Parsons

Finance Minister Enoch Godongwana tabled his 2023 Medium-Term Budget Policy Statement yesterday. Photo: GCIS

Finance Minister Enoch Godongwana tabled his 2023 Medium-Term Budget Policy Statement yesterday. Photo: GCIS

Published Nov 2, 2023


Professor Raymond Parsons, North-West University Business School: ‘In the face of pressing economic and fiscal challenges, the Medium-Term Budget Policy Statement (MTBPS) presented to Parliament by Finance Minister Enoch Godongwana offered a realistic, but vulnerable fiscal picture for South Africa.

Several of the fiscal risks outlined in the main February Budget have materialised and were recognised by the Minister. While it may have been inevitable that the Medium-Term Budget has allowed public debt levels to rise even further it must be seen as a stop-gap measure that still needs to be remedied by appropriate economic steps. There was clearly no appetite for tough decisions in the Medium-Term Budget.

On the positive side, the MTBPS recognised that whatever the current fiscal strains, public finance sustainability in the longer term ultimately depends on higher inclusive economic growth and renewed spending consolidation.

The commitment to streamline national departments and other public entities to reduce the costs of government is also welcome. The enforcement of strict conditions surrounding bailouts to distressed state-owned entities such as Transnet and Eskom as outlined in the MTBPS is needed. It was also inevitable that the Social Relief of Distress grant be extended for another two years.

However, South Africa's public finances remain on a slippery slope, and the risks to the fiscal outlook remain elevated. It is, thus, necessary that such remedies and reforms as were promised in the Medium-Term Budget are tangibly implemented as soon as possible.

With the overall debt-to-GDP (gross domestic product) ratio now projected to reach 77% in two years' time, this will be the highest ever in South Africa’s fiscal history. What still appears to be lacking in the 2023 MTBPS is a clear fiscal plan to wind down deficits and government spending over time.

Sanisha Packirisamy, an economist at Momentum Investments: Today’s budget outcomes highlight a prudent approach to fiscal spending with R154bn in proposed cuts to expenditure over the next three fiscal years. However, the bulk of these cuts are expected to fund the overrun in the wage bill rather than more productive spending in the economy.

Fiscal consolidation remains challenging in a low growth environment. While growth in GDP on a per capita basis averaged 1.4% for developed markets over the past decade and 2.7% for emerging markets, growth in per capita GDP has declined by 0.4% on average for South Africa.

Treasury highlighted that long-term fiscal risks include: Lower potential growth, difficulty in executing government’s borrowing strategy and spending pressures (particularly at local government level and at the state-owned entities).

South Africa's debt burden remains substantial, and the threats to controlling spending and providing additional funds to troubled state entities and struggling municipalities are still significant in the medium to long run. Many challenging fiscal decisions are essentially being delayed rather than addressed, in our view.

The speed of reform efforts remains disappointingly slow, especially in the face of sluggish economic growth, making a stronger push for implementation essential. With low growth posing a fiscal risk amidst a more divided voter base and increasing socio-political demands on government resources, particularly in the pursuit of upward mobility due to insufficient employment opportunities, South Africa's path to fiscal consolidation and debt stabilisation is squeezed between limited growth prospects and mounting expenditure pressures.

Consequently, while credit ratings are likely to stay stable in the short term, the persistent fiscal and growth risks over the medium to long term suggest a potential downside risk to South Africa's sovereign rating outlook in the future.

Andrew Bahlmann, CEO: Corporate and Advisory, Deal Leaders International: The MTBPS released on November 1, 2023, aims to attract private sector investment into network industries that have been dominated by the state for years.

Deputy finance minister David Masondo noted that supply-side constraints in electricity, logistics, water and skills undermined growth, so these state-dominated sectors needed to be liberalised. He says the government seeks to “crowd in” the private sector into those network industries.

This is good news for foreign investment and the potential for inward mergers and acquisitions (M&A), as any move in this direction can be expected to increase competition and efficiency. Nonetheless, it is too early to predict the impact of this policy on inward foreign direct investment (FDI) into South Africa and the prospects for increasing inward M&A.

There’s no doubt that productive private sector investment is an important component of competitiveness and growth strategies for developing countries. Attracting foreign direct investment, in particular, helps to link a country’s domestic economy to global value chains in key sectors.

The MTPBS is sending many positive signals, but there remains a long way to go. Policy makers need to accelerate the introduction of independent regulators in network industries – such as Transport Economic Regulator – and accelerate privatisation in energy, transport, telecommunications, infrastructure, and related services sectors.

While increased competition and efficiency in various sectors could potentially attract private sector investment and foreign investors, it is equally important to note that there are several factors that influence the decision of private sector investors to embark on FDI or inward M&A - such as political support for public-private partnerships, a more positive attitude by government towards private sector investments, tax rebates on imported equipment and political stability in municipalities.

PPS Investments: Even prior to Godongwana’s MTBPS Address, it was widely known that South Africa’s fiscal health deteriorated this year. This, however, did not render the “Mini-Budget” any more palatable. In short, it seems the mining company tax windfall of yesteryear was but a flash in the pan for our fiscal woes, and the more familiar anaemic-growth-and-much-needed-fiscal-austerity narrative, is in play.

In addition to global growth decelerating and financial conditions tightening, the South Africa economy is being held back by inadequate electricity and logistics infrastructure. The weaker growth environment prompted National Treasury to adjust its 2023 GDP growth forecast downwards, from 0.9% to 0.8%.

Alongside the tepid growth outlook, global commodity prices have also fallen this year. This has led to a significant drop in mining sector profits and therefore taxes accruing to the fiscus. This is the main driver behind the main budget deficit widening to 4.9% from the previously forecast of 4.0%.

A higher wage bill and higher debt-servicing costs also contributed to the R54.7 billion increase in the main budget deficit compared to the 2023 Budget...

In response, the Minister has announced spending reductions and reprioritisations, while also attempting to take steps to support growth. As noble a pursuit as this is, in practice, these objectives are incredibly difficult to achieve individually, let alone simultaneously, so this may be some wishful thinking on the Minister’s part. Bear in mind there is an election coming up next year...

Addressing lifting our economic growth trajectory, the Minister rightfully, singled out Eskom as being a key constraint to growth. Headwinds faced are expected to ease going forward given renewable energy trends and the repair of certain units at Eskom, however the easing of self-generation restrictions and private investments in the area will no doubt mean Eskom may continue facing challenges.

Although touched on in his speech, it is unclear how the difficulties faced by Transnet will be resolved, where rail underperformance is estimated to have cost the South Africa economy up to 5% of GDP in 2022.

Overall, the market seemed to take the MTBPS in its stride, with bonds and the rand trading firmer after the release. This, however, is more a function of how low expectations were prior to today. Going forward, South Africa still has major challenges to overcome, many of which stem from the fact that our debt position is unsustainable. Given our structurally low growth economy, our debt trajectory will not improve, until we can sustainably engineer a budget surplus. In the absence of growth, this is extremely difficult to achieve politically.

Market implications reaction: Chantal Marx, Head of Investment Research at FNB Wealth and Investments: On balance, the MTBPS was more negative for equities than for bonds.

It was widely anticipated that revenue would fall short relative to Treasury’s expectations, that the stabilisation in government debt to GDP would be pushed out, and that non-interest expenditure rationalisation would be on the cards. It can therefore be argued that this was already “priced in”.

The government’s commitment to its consolidation strategy (debt to GDP is still expected to stabilise in 2025/26, albeit at higher levels) and non-interest expenditure growth below inflation will be welcomed by bond investors. About two hours before the start of the speech, Treasury also announced that there will be no change in bond issuance post the MTBPS. The market reaction at the time was positive, with a net yield swing of roughly 20 basis points on the ten-year bond yield following the announcement.

This prudence, however, will likely be perceived as equity negative. Lower non-interest expenditure means that government contributes less to economic growth and that will have a knock-on impact on corporate revenue growth and by extension, profitability.

The guidance provided in terms of possible policy changes come the 2024/25 Budget in February will also be weighed by investors. Standing out to us in terms of the markets:

Bond and equity investors will be encouraged by additional external financing of infrastructure projects as it will reduce government’s finance burden and will boost economic growth if implemented effectively.

New tax measures to raise additional revenue will be regarded as more bond positive (higher government income) but will be equity negative (either lower consumer discretionary income or lower corporate profitability, or both) although the sum mentioned should not have too big an impact against an already cheap SA Inc basket.

As the minister spoke, the rand strengthened from about R18.70 to the US dollar to as low as R18.55, and bond yields fell across the curve. The JSE ticked up slightly, driven by an uptick in the SA Inc shares – largely explained by the rand and bond yield movements.

CEO at Momentum Corporate, Dumo Mbethe: In the MTBPS, it was concerning that the Two-Pot System was not even mentioned. However, Momentum Corporate would be in full support of the National Treasury's decision to delay the implementation of the two-pot retirement system until 2025. A delay would allow for careful planning and consideration, acknowledging the importance of a smooth transition for all stakeholders in the retirement industry.

We stress the importance of member education to empower individuals to make informed decisions about their retirement savings. The extended period should offer us all an opportunity for constructive engagement with all stakeholders to refine the implementation plan and address potential challenges.