MTBPS — Economic backdrop to the mini-budget is the brightest it’s been in years

27 Oct 2024

As Enoch Gondongwana prepares for the mid-year mini-budget, the finance minister will be relieved that for a change things are looking better and not bleaker.

When Minister of Finance Enoch Godongwana mounts the podium to deliver his Medium-Term Budget Policy Statement (MTBPS) on Wednesday, 30 October, he might be forgiven were he to don sunglasses. To paraphrase a popular pop song by Timbuk 3, the future’s so bright compared with his past presentations that he might have to wear shades.

The MTBPS is a blueprint of the policy fiscal framework for the next three years with projections and sets the stage for the annual budget in February.

When Godongwana unveiled the MTBPS last year, the economy was in a deep rut and a “fiscal cliff” was looming. Eskom’s rolling blackouts were on track for a record annual performance, the economy had contracted 0.3% the previous quarter, consumer inflation was 5.5% on an annual basis and the rand was fetching 18.70/dollar.

Read more: Muted responses to reality-check MTBPS as SA’s debt debacle impacts economic growth

The government’s tax revenues had declined since the February 2023 budget – a reflection of a deteriorating economy – and debt levels were seen to be finally “stabilising” at a ratio of 77.7% of GDP in 2025/26 compared with the 73.6% of GDP outlined in the February budget. And the looming election that would come in May 2024 had risk-averse investors on tenterhooks.

The contrasts between then and now are striking in many ways. The formation of the Government of National Unity (GNU) has boosted confidence and seen an unwinding of much of the political risk that was priced into South African markets.

The rand, after flirting with 17.0/dollar in September, was fetching 17.74/dollar this week – still significantly stronger than its levels this time in 2023. The nationwide power blackouts were suspended in March and inflation has slowed to 3.8%.

These trends, combined with a renewed drive between the government and business to tackle South Africa’s logistical and crime challenges, have lifted the economic growth outlook. Business leaders are now talking of growth of more than 3% in 2025 if Eskom’s blackouts are brought to a permanent halt, crime and corruption are curtailed and state-run logistics operator Transnet gets its groove back.

The power crisis alone was seen as shedding 1.5 to 2.0 percentage points from South Africa’s economic growth profile, so such optimism may not be far-fetched and signals a fresh injection of business confidence that has been lacking.

For a change, economic growth forecasts are being revised up rather than down, though they are, for now, fairly modest. The International Monetary Fund (IMF) has just upped its South African growth forecast for 2024 by 0.2 percentage points to 1.1% and by 0.3 percentage points for 2025 to 1.5%.

Fiscal position

Faster rates of economic growth will boost the government’s fragile fiscal position in a number of ways. The debt-to-GDP ratio will fall – if a lid is simultaneously kept on borrowing – because the economy is getting bigger faster. This translates into higher tax revenues, reducing the need for accumulating debt. In turn, this should boost South Africa’s risk profile and lower the crippling costs of borrowing.

It’s still a steep mountain to ascend after years of unfolding state failure marred by the bailouts to underperforming state-owned enterprises (SOEs), overspending, squandering, siphoning and stealing that saw South Africa’s debt levels surge and its credit ratings descend deep into junk status.

Analysts don’t expect the MTBPS to trigger a ratings upgrade. “Significant challenges remain with per-capita income growth having stagnated for over a decade,” Razia Khan, head of research for Africa and the Middle East at Standard Chartered Bank, said in a note on the MTBPS.

“GNU members … have staked political capital on an economic turnaround. But the current trajectory may be inadequate to secure a credit rating upgrade, let alone a structural transformation and a reduction of inequality.”

But polite applause from the ratings agencies is expected. “Rating agencies will likely view the midterm budget in a positive light, but economic growth is still too low and current debt levels too high to warrant credit rating upgrades at this stage,” said Jee-A van der Linde, senior economist at Oxford Economics Africa.

The Treasury has been able to tap some additional sources of support, but that is seen as stemming the tide rather than rolling it back. The two-pot reforms allowing for an early withdrawal from pension funds are boosting tax revenues, and the valuation gains from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) have helped cut borrowing requirements and debt-servicing costs. The government will receive R150-billion from this pot in tranches over the next three financial years.

Read more: Reserve Bank sees two-pot shot boosting SA’s economic growth by up to 0.7 percentage points

However, as Van der Linde warned: “That alone is not sufficient.” The Treasury currently forecasts that gross loan debt will increase from R5.21-trillion or 73.9% of GDP and peak at 75.3% of GDP in 2025/26.

“Despite the temporarily reduced pace of debt accumulation thanks to the GFECRA profits, we still expect government debt to breach 80% of GDP over the medium term,” Van der Linde said.

The IMF has suggested a debt ceiling as one remedy, and Godongwana may address that. Further SOE bailouts, notably for the Post Office, could also be outlined, but they will be a fraction of the massive lifelines thrown in the past.

There is also speculation that Godongwana could raise the possibility of lowering the central bank’s inflation target to 3% from the current range of 3% to 6%. Reserve Bank Governor Lesetja Kganyago made the case for this in a recent speech, but the Treasury may not be ready to pull the trigger on this yet.

Godongwana will have a tough balancing act, but the outlook is at least the brightest that it has been for years. To return to Timbuk 3, The Future’s So Bright, I Gotta Wear Shades was the band’s only chart-topping song. Hopefully, Godongwana will not be a one-hit wonder with this MTBPS. DM

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

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