National Treasury’s (NT’s) 2022/2023 Budget, tabled in Parliament on Wednesday (23 February) by South Africa’s (SA’s) Minister of Finance Enoch Godongwana, turned out to be a fairly neutral affair with the market having already largely priced-in many of the ‘good news’ elements of the budget. The anticipated revenue overrun was partly used for a permanent reduction in the debt/GDP ratio and partly absorbed by expenditure increases. The final tax revenue figures for the 2021/2022 financial year exceed the 2021 Budget estimate by R181.9bn and the 2021 Medium Term Budget Policy Statement (MTBPS) estimate by R61.7bn. This better-than-expected performance, while broad-based, has largely been driven by corporate income tax (CIT). The sterling CIT performance is attributed to high commodity prices, which have boosted the profits of mining companies over the period.
Overall, the expenditure adjustments appear to be largely reasonable. Aside from the temporary extension of the COVID-19 social relief of distress grant, previously announced in the State of the Nation Address (SONA), the increases outlined aim to ease pressure on specific spending areas that were particularly impacted by last year’s spending restraint. Said key increases refer to 1) increasing the value of social grants by inflation (previously, increases were below inflation); and 2) increased allocations for the health and education departments. Notably, there were also increased allocations for the National Student Financial Aid Scheme (NSFAS) as well as infrastructure investment and employment programmes, including the presidential employment initiative.
Positively, the NT now forecasts gross loan debt will stabilise at 75.1% of GDP in 2024/2025, significantly better than the 90% projection two years ago and slightly better than the projection of 78.1% from November’s MTBPS. Importantly, it appears that the finance minister is staying the course on fiscal consolidation. There are no new state-owned entity (SOE) bailouts, the government wage growth is set to 1.8% p.a. until 2025, and social spending essentially grows by inflation. Whether these stay the course will remain to be seen. Whilst NT remains steadfast on its communication that any permanent increase in the social relief of distress grant (or similar grants) will require a sustainable financing model, the execution risk remains very high for all three these spending areas (grants, wages, and SOE bailouts). Perhaps the most important takeaway is that there appears to be more policy coordination than before. The budget overlaps nicely with the SONA and other pronouncements- previously ministers had a policy discourse that pulled in various directions.
Overall, the budget is largely neutral but somewhat positive for bonds and the rand. Investors will likely be pleased with deficits that are moderately smaller over the medium term than the consensus economist forecasts had expected, though they may still be concerned about downside risks to growth and the inevitable end to the current strong commodity cycle and what that will mean for tax revenues going forward.
Furthermore, investors will also be encouraged by the government’s continued rhetoric around its commitment to fiscal consolidation, wage bill curbs, disciplined SOE support, and permanent increases in social grants, only if accompanied by a sustainable funding plan. However, apart from the execution risk, there is also still plenty of uncertainty surrounding Eskom’s debt problem with very little detail provided in that regard. Nevertheless, general SOE reforms (outside of progress with energy reforms), remain frustratingly slow. Time will tell if progress with the proposed growth reforms augments the necessary fiscal consolidation to ensure SA’s debt stabilisation.
