Mini budget - Economic growth forecasts remain dire, casting doubt on debt reduction targets

26 Oct 2022

The Medium-Term Budget Policy Statement unveiled on Wednesday by Finance Minister Enoch Godongwana has ambitious targets to cut South Africa’s swelling debt burden. But economic growth forecasts remain dire and may be optimistic, undercutting the government's ability to reduce debt.

South Africa’s road to “fiscal consolidation”, to use the term of art, is strewn with gaping potholes. The biggest one is the economy’s inability to grow at a sufficiently brisk pace to boost revenues while bringing the debt ratio to gross domestic product lower.

The Treasury’s own economic growth forecasts remain woefully short of the task of slashing the debt burden without some serious austerity measures, which are not going to fly. To wit, Treasury has cut its forecast for growth this year to 1.9% from 2.1% previously, but even that looks optimistic against the backdrop of the recent Transnet strike, the surge in rolling blackouts, rising interest rates and slowing global growth.

“GDP growth is expected to average 1.6% over the medium term,” the MTBPS says, which seems more realistic, but hardly seems to be the kind of rate needed to bring the debt burden to heel.

Gross loan debt is seen stabilising at 71.4% of GDP in 2022/23, which is two years earlier and at a lower level than what was forecast in the 2022 Budget Review. Net loan debt — which is gross loan debt less cash balances — is forecast to stabilise at 69% of GDP in 2024/25.

These targets are commendable, but achieving them when the economy is growing at such a sluggish pace must surely invite a healthy dose of scepticism.

The MTBPS notes that the recovery from the pandemic meltdown “has been hampered by slow implementation of economic reforms and a series of shocks, including the domestic riots and looting in July 2021, historic flooding in April 2022 and escalating power cuts.”

And there are risks galore to the already bleak growth outlook, which the MTBPS highlights.

“The global outlook is also becoming less favourable, with a broad slowdown marked by higher levels of volatility. Global inflation has risen sharply as a result of supply chain shortages exacerbated by the Russia- Ukraine war. As central banks take necessary action to combat inflation by raising interest rates, developing countries are experiencing tightening financial conditions, constraining investment and household demand. Slower growth in China is having significant consequences for commodity-exporting economies,” it says.

“South Africa’s economic growth levels remain low and insufficient to tackle high poverty and unemployment,” it also pointedly says, which speaks to the tailspin the economy finds itself in.

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Poverty and unemployment at such levels are themselves constraints to the GDP growth rates that many economists say are needed to tackle these twin scourges in the first place.

To this end, the MTBPS says the government aims to implement “growth-enhancing reforms, including by addressing the shortage of electricity and dealing with long-running structural constraints in the economy.”

It also calls for “enhancing key enablers for growth and state capability, such as fighting crime and corruption and improving municipal services. The fiscal framework prioritises additional funding for safety and security, and infrastructure.”

The MTBPS touts a number of reforms it says have been made since February “that are expected to support investment and job creation ... In transport, the Transnet National Ports Authority has been corporatised, an important first step in raising the competitiveness of South Africa’s ports. Third-party access to the freight rail network is being pursued.”

Of course, like a container at Durban port, there has in fact been little movement on this front yet.

“In telecommunications, the auction of broadband high-value spectrum has been completed,” it notes, which is certainly a plus, even if it was long overdue.

“Several visa reforms have been completed. These include reviewing the policy framework and processes for work visas ... A revised critical skills list has been published to help address the country’s skills deficit,” it says.

Yet Home Affairs remains a shambolic mess and can hardly be trusted with even getting this stuff right.

South Africans have heard much of this before, and with the ANC’s elective conference looming, the politics don’t look promising. Meanwhile, economic growth will continue to limp along at levels that can hardly address poverty, unemployment or “fiscal consolidation.” DM/BM

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