South African Finance Minister Enoch Godongwana is under pressure to show efforts to reduce the country’s fiscal deficits and rein in debt won’t be compromised by new spending measures in this week’s budget.
Godongwana will present the government’s spending framework for the next three years on Wednesday, as the economy struggles to recover from the damage wrought by the coronavirus pandemic, including South Africa’s discovery of the omicron variant that sparked a flurry of international travel restrictions. It’s also been hobbled by deadly riots and ongoing electricity supply constraints.
High commodity prices have given him some leeway. The windfall means revenue is on course to exceed estimates and the budget deficit will probably narrow faster than previously expected. Still, investors will look to the head of economic transformation in the ruling African National Congress to minimise long-term risks linked to the expansion of the social welfare net, highly contested public-sector pay negotiations and debt-laden power utility, Eskom.
Potential slippage on the government wage bill, a larger and more permanent form of basic income support and additional bailouts to fragile state-owned companies remain key risks to fiscal consolidation and debt stabilisation in the medium to longer term, Momentum Investments analyst Sanisha Packirisamy said in a note.
What Bloomberg Economics Says…
“Better-than-expected revenue collections will again improve South Africa’s fiscal metrics when Finance Minister Enoch Godongwana tables the nation’s budget. But the country is not out of the woods — a debt crisis looms if the government opts to raise spending with no credible strategy to boost the pace of growth.”
— Boingotlo Gasealahwe, Africa Economist
Of 16 economists in a Bloomberg survey, 81% think President Cyril Ramaphosa’s latest extension of a monthly grant for the jobless, first introduced in response to the pandemic, will become permanent. Almost two-thirds of survey participants see the country introducing a basic income grant before national elections in 2024.
A permanent expansion of the welfare net means the government will have to consider more borrowing and raising taxes or postponing plans to lower the corporate tax rate.
That could further erode the tax base in a country where personal income levies, paid by about 7 million people, contribute 40% of total tax revenue. It would also weigh on economic growth which will probably won’t top 2% for the next two years, according to a separate Bloomberg survey.
Ten out of fifteen economists don’t see Godongwana following through on his predecessor Tito Mboweni’s plan to lower the corporate tax by one percentage point to 27% from April. Firms including PwC and ENSafrica said in their predictions last week the minister might only make the announcement of a lower company tax rate in the 2023 budget because the introduction of steps to broaden the tax base were delayed to allow the economy time to recover from the impact of the pandemic.
Failure to clinch a new three-year pay deal with labour groups that represent about 1.3 million civil servants could also add to spending pressures. Talks that could run until March next year mean the National Treasury will have to continue paying state workers cash gratuities that could cost more than its R20.5 billion ($1.4 billion) annual estimate, according to survey participants.
The Treasury won’t pencil additional costs into the budget so as not to “front-run” the wage negotiations, Sisamkele Kobus, a fixed income analyst at Ninety One, said in a note. A spending slippage of at least R184 billion, about two-thirds of which will be for welfare payments and the remainder for public-sector pay, is likely over the next three years, she said.
The expected improvement in the country’s medium-term debt profile could also be derailed if the state decides to take over part or all of Eskom’s R392 billion of debt.
Surging government debt and the cost of servicing it, the fastest-growing expenditure line item in the budget since 2011, are key risks and shifting Eskom’s obligations onto the state’s balance would lead to a marked deterioration in public finances.
Until the economic “growth outlook can be raised higher on a sustainable basis, it is difficult to see how the fiscal position can improve over the medium term,” said Gina Schoeman, an economist at Citibank South Africa. “A short-lived — even if for two years — commodity cycle that leads to a windfall of revenue can’t be matched with permanent expenditure in other areas.”