On 26 October, South Africa’s (SA’s) Minister of Finance Enoch Godongwana will table the 2022 Medium Term Budget Policy Statement (MTBPS) amid an increasingly complex global economic environment characterised by heightened levels of volatility. Locally, the economy is dealing with domestic energy and logistics crises, limiting growth over the next 12 to 18 months and the upcoming ANC elective conference in December 2022. Nonetheless, SA’s fiscal position remains relatively sound, having avoided a fiscal cliff in 2021, largely thanks to the surge in global commodity prices. However, a high country-risk premium embedded within local government bonds, for example (compared with other emerging markets [EMs]), reflects continued uncertainty about the growth/expenditure dynamics over the Medium Term Expenditure Framework (MTEF) period.
The MTBPS serves several important roles, including setting out National Treasury’s (NT’s) policy framework for the February 2023 Budget, updating NT’s economic forecasts for SA, and adjusting the budgets of government departments. This year’s MTBPS is expected to address several critical long-term outstanding issues. However, the baseline MTEF forecast will likely provide concrete numbers only when the Budget Review is presented in February 2023. The deterioration in key state-owned enterprises (SOEs) performances has been a severe limitation on SA’s growth potential, and the MTBPS is expected to outline some of the government’s plans for Eskom’s debt, with the market anticipating that the state may absorb at least some portion of said debt.
The current fiscal year of 2022/2023 has seen a marked lift in inflation, which will boost nominal GDP, against which the fiscal ratios are calculated, thus easing both fiscal debt and deficit projections as a percentage of GDP. Overall, we anticipate a revenue overrun of at least c. R80bn this year, which will likely fade in subsequent years. As it currently stands, this overrun is being dominated by the overshoot in company income tax, although multiple tax categories have been outpacing NT’s full-year forecasts. Nonetheless, we expect NT to strike a reasonably conservative approach in future revenue forecasts, given the severe downside risk to growth and revenue from domestic growth constraints and a weakening global economy. Regardless, the beneficial impact of the current forecast revenue overrun on the government’s debt burden will probably ultimately be eroded by the fiscal support likely to be announced for Eskom and other spending pressures, such as increased public sector wages and household support measures.
The MTBPS will also likely allude to these issues, even if it may not fully answer them. Nonetheless, amidst all these factors, and in anticipation of the upcoming tabling of the MTBPS, the points highlighted below form part of our wish list, or set of ideals, for this year’s MTBPS:
- Acting against those implicated in wrongdoing at the Zondo Commission of Inquiry into Allegations of State Capture, particularly amid the heightened tensions surrounding the possibility of SA being placed on the Financial Action Task Force’s (FATF’s) greylist.
- 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 demonstration of government’s intention to follow a path of fiscal consolidation with difficult actions rather than simply words.
- A credible plan highlighting government’s intention to continue to bring debt accumulation under control.
- A demonstration of additional measures to improve the ease of doing business in SA.
- Further details surrounding potential liabilities of the Road Accident Fund (RAF), as well as other smaller 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.
- A clear intent to renew the ailing infrastructure at the country’s ports, particularly in the wake of the recent devastating strike at Transnet.
- Detailed plans to address the financial distress of municipalities around the country.
- The presentation of feasible growth targets that reflect the current economic reality of the country and the global economic environment at large.
- Clarity surrounding changes to the current grant system, i.e., will a formal basic income grant be implemented?
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, some of the abovementioned points are unchanged from previous wish lists (Anchor’s 2022 budget wishlist, dated 20 February 2022, and Anchor’s wish list for the November 2021 MTBPS, dated 22 October 2021) which is indicative of the many uncertainties and unanswered questions still present in SA’s fiscal space.
In our view, the extent to which new spending absorbs any fiscal windfall is crucial as it would reflect the government’s true commitment to fiscal consolidation. Regardless, the impact of the anticipated positive ‘mini-budget’ this year on markets is likely to be overshadowed by the heavy risk aversion environment in global financial markets, as it occurs in the run-up to the November US Federal Open Market Committee (FOMC) meeting. Overall, SA’s fiscal situation remains precarious, particularly amid the current volatile global economic environment. Thus, striking the right balance between providing relief and improving the fiscal prognosis of the country is imperative.