On 21 February, South Africa’s (SA’s) Minister of Finance Enoch Godongwana will deliver the 2024 Budget Speech to the National Assembly in Parliament. This year’s budget will be tabled amid an even more challenging economic and socio-political environment than previous iterations, given the upcoming national elections, the decades of policy inertia and years of state capture that preceded.
For 2024, our economic growth forecast (at c. 1.0% YoY GDP growth) aligns with that of the Medium Term Budget Policy Statement (MTBPS), tabled on 1 November 2023. We do not foresee a material change to this forecast in the upcoming budget. However, for 2025, the MTBPS’s 1.6% YoY growth forecast will likely prove too strong, given persistent loadshedding and the many structural issues currently hampering the South African economy. SA’s many infrastructure challenges, deteriorating municipal service delivery and reports of a rising crime rate are further weighing on confidence. In the years ahead, achieving sustainably stronger economic growth will depend partly on SA’s ability to design and implement reforms that lift confidence and investment. As such, beyond this year, we forecast real GDP growth of c. 1.6% in 2025 and an average growth rate of 1.5% p.a. until 2027. Nevertheless, there is a growing downside risk to the medium-term revenue growth forecasts, with longstanding concern about weak trend growth aggravated by the electricity crisis.
We do not expect the 2024 Budget to introduce any new, significant populist policies or spending measures before the election. Instead, we believe it will serve more to highlight the significant allocation towards pro-poor initiatives already in place or progress. This includes earmarking R252bn for the 27mn social grant recipients and advancing the National Health Insurance (NHI) scheme. The Treasury will likely maintain its commitment to fiscal consolidation, which entails taking a firm stance on further financial assistance to State-Owned Enterprises (SOEs). Specifically, we do not foresee additional financial injections for entities like Transnet or Eskom in the upcoming budget.
Additionally, the utilisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) is proposed to offer some relief in funding concerns. However, it should not be viewed or regarded as a complete solution. Expectations are that the GFECRA will be utilised cautiously, with established guidelines to ensure responsible future use. While investors remain uncertain about fiscal sustainability, there is credibility in the potential for debt stabilisation, albeit contingent upon trend growth. Nevertheless, we remain cautious that the risk around increased spending remains skewed to the upside.
On the revenue front, tax revenues YTD have generally aligned with the Treasury’s forecasts for the entire fiscal year despite varying trends across different tax categories. However, an analysis of spending trends up to this point suggests a potential, albeit modest, overshooting of expenditure. The upcoming budget announcement on 21 February is projected to present fiscal ratio forecasts similar to the revisions made in the 2023 MTBPS. This is due to the entrenched fiscal slippage noted in November 2023, thereby delaying fiscal consolidation efforts. In the November 2023 MTBPS, gross debt was anticipated to peak at 77.7% of GDP by 2025/2026, significantly surpassing the February 2023 Budget estimate of 73.6% of GDP for the same period. Of concern is the projection that gross debt will exceed 70.0% of GDP by 2031/2032, undermining the sustainability of government finances. Typically, a debt ratio of 60% of GDP is the maximum sustainable level for an emerging market economy.
Fiscal consolidation efforts aside (given that the budget comes ahead of the elections), as mentioned previously, one of the key questions is whether the government announces a big burst of spending on areas such as free higher education, the NHI or the basic income grant. Regardless, amidst all these factors, and in anticipation of the upcoming tabling of the 2024 Budget, the points highlighted below form part of our wish list, or set of ideals, for this year’s Budget:
- Taking action against those implicated in wrongdoing at the Zondo Commission.
- No budget reduction for the National Prosecuting Authority (NPA) or, better yet, allocating more money to the NPA and the Special Investigating Unit (SIU) to fight rampant corruption.
- A continued demonstration of the government’s intention to follow a path of fiscal consolidation with difficult actions rather than simply words.
- A credible plan that brings debt accumulation under control and where debt levels begin to come down rather than escalating at a slower pace.
- A demonstration of additional measures to improve the ease of doing business in SA.
- A credible turnaround plan for Transnet, with a priority emphasis given its central, critical role in the greater SA economy.
- Further details surrounding potential liabilities of the Road Accident Fund (RAF), as well as other SOEs, which are currently in distress, including Denel, the Land and Agricultural Development Bank of SA (Land Bank), the SA National Roads Agency (SANRAL), etc.
- Detailed plans to address the financial distress of municipalities nationwide.
- Clarity surrounding the future of the Social Relief of Distress (SRD) grant – will it finally be formalised into a basic income grant? Will the benefit level be raised?
- Clarity around the proposed NHI.
Whether any of the abovementioned wish list items will come to fruition remains to be seen. Plenty of other fiscal-related issues also need to be addressed, and this list is by no means exhaustive. Interestingly, the abovementioned points are relatively unchanged from the wish list we released prior to the 2023 February Budget and MTBPS – indicative of the many uncertainties and unanswered questions in SA’s fiscal space. Overall, reining in new expenditure pressures is key, as is making savings, avoiding wastage, inefficiency, and inappropriate spending, focusing on economic growth-creating initiatives, and spurring the rapid repair of the electricity sector.
