Clouds of uncertainty make the path ahead tricky for Godongwana and his Treasury team

If Table Mountain is swathed by mist on Wednesday, 19 February, it will provide an ominously appropriate backdrop to Finance Minister Enoch Godongwana’s unveiling of his annual Budget Review.

A growing haze of geopolitical and economic uncertainty is gathering and could render many of the budget’s forecasts obsolete before the ink has dried.

“We have seen this before, where big global events can have a dramatic impact on the budget. And in South Africa’s case, the last week or so has highlighted that there is an additional level of fragility to the economy,” Daniel Silke, director of the Political Futures Consultancy, told Daily Maverick.

“And of course, that fragility is associated with potential trade sanctions and also the general fallout from a very negative attitude in Washington about South Africa, which could have an impact on US foreign direct investment and plans by American companies to expand further here.”

The raging elephant in this room is, of course, the new administration of US President Donald Trump, who is notoriously thin-skinned and is acting like a pachyderm in a china shop.

Trump has frozen aid to South Africa, and further sanctions might loom in the wake of President Cyril Ramaphosa’s recent signing of the Expropriation Act, which allows for the expropriation of land without compensation in some circumstances.

South Africa’s participation in the African Growth and Opportunity Act, which provides duty-free access to the US market, is also now on the line. A sharp decline in South African exports to the US will hit the rand and domestic economic growth.

And then there is the looming threat of Trumpian trade wars, which are viewed as fanning the flames of global inflation and pushing interest rates up around the world.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) recently crunched the numbers on a trade war scenario. “The scenario showed higher inflation and interest rates globally, as well as greater risk aversion in financial markets,” the central bank said in January.

“In response, our model projected the rand depreciating to nearly R21 to the dollar, with domestic inflation reaching 5% and the policy rate half a percentage point higher at its peak, relative to the baseline forecasts.”

That would take the rand into uncharted territory, curtail economic growth and put paid to many of the forecasts that the Treasury team has painstakingly modelled for the upcoming budget.

“It’s going to be extremely difficult for South Africa to put on a suit of armour against these geopolitical headwinds and the risks that are swirling about. The levels of uncertainty are probably at their highest in many decades,” Silke said.

Domestic bright spots

Since the formation of the Government of National Unity (GNU) last year, there is a perception that South Africa’s domestic political scene is much less uncertain than it was when the previous budget was presented this time last year – and that there is political will to curb government spending and bring in badly needed economic reforms.

“The key theme for this year’s budget will likely be balancing expenditure and revenue in a low-growth environment, without the ability to significantly raise taxes or increase debt,” said Maarten Ackerman, chief economist at Citadel.

South Africa’s economic growth rates remain woeful. The International Monetary Fund estimates that the economy only grew 0.8% in 2024 and it forecasts an expansion of just 1.5% this year. The SARB expects growth to reach 2.0% only by 2027.

South Africa’s growth trajectory will have huge implications for the Treasury’s revenue flows and its ability to contain swelling debt levels – which are what the markets and ratings agencies are laser-focused on.

“A major focus will be fiscal consolidation, ensuring that our debt-to-GDP levels stabilise over the next three years while managing expenses such as the public-sector wage bill. The government must tread a fine line between maintaining essential spending and avoiding excessive reliance on borrowing,” Ackerman said.

South Africa’s debt-to-GDP ratio is projected to have reached almost 75% in 2024/25 from a very manageable 23.6% in 2008/09 – back when the country had a coveted investment grade credit rating.

In the Medium-Term Budget Policy Statement unveiled in October last year, Treasury said the debt-to-GDP ratio was expected to peak at 75.5% in 2025/26. 

Godongwana and his team have limited tools at their disposal to make that goal a reality, and any doubts will immediately be reflected in the bond and rand markets.

But to really rein in soaring debt levels, Godongwana would need to wield a panga. The GNU should give him more room to make cuts, but a scalpel is more likely to be applied.

South Africa already has a high tax burden and most taxpayers see little value for what they pay, and so big hikes are not expected beyond the usual targets of booze and cigarettes. 

Any announcement on funding for state-owned enterprises will be subjected to sharp scrutiny, but the ship of state seems to have sailed on that draining lifeline. No big surprises are expected here. 

But to really rein in soaring debt levels, Godongwana would need to wield a panga. The GNU should give him more room to make cuts, but a scalpel is more likely to be applied.

On the wider policy front, there might be an update on progress on the Treasury’s discussions with the SARB about lowering the central bank’s inflation target.

It is 3% to 6% and the bank has strongly signalled that it would like to see 3% cast in stone to firmly anchor inflation expectations. Annual consumer inflation is running at a subdued 3%, which has allowed the SARB to cut interest rates by 75 basis points since September 2024.

But the menacing cloud of Trump and his far-right administration threatens this parade with a deluge. The MPC’s scenario of the rand tanking to R21 to the dollar in the face of Trump trade wars will make a 3% inflation target almost unreachable.

The economic growth and debt-to-GDP forecasts Godongwana tables on Wednesday might also prove unreachable in the face of this gathering storm.

The Treasury has also signalled that it will instruct departments to reprioritise expenditure for G20 events according to its technical funding guidelines for the upcoming budget. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.