Annabel Bishop
The 2024’s Medium-Term Budget Policy Statement (MTBPS) saw a deterioration in the fiscal metrics against expectations, causing the rand to weaken to R17.76 against the dollar from R17.63 and bond yields rose.
However, a strong gross domestic product (GDP) print in the US yesterday for quarter three 2024, at 2.8% quarter-on quarter seasonally adjusted (qqsa), versus quarter two 2024’s 3.0% qqsa, along with a sharp drop in the core PCE deflator, to 2.2% year on year (y/y) from 2.8% y/y, resulted in a reduction in risk aversion and so US dollar weakness.
This counteracted much of the rand’s reaction to the MTBPS, indicating that the US remains on track for a soft landing, with the rand chiefly determine by international events, particularly those in the US.
The projected budget deficit rose to -5.0% this year (2024/25), versus the -4.5% projected in the February Budget, and the -4.4% of the Bloomberg consensus (all as a % of GDP). Similarly, the medium-term, saw projections rise as well from -3.7% to -4.3% for 2025/26, to -3.6% from -3.3% for 2026/27, and -3.2% 2027/28 (Bloomberg consensus -3.9%, -3.5% and -3.3%, respectively).
Worryingly, gross debt remains above 60% of GDP (the maximum sustainable debt ratio for an emerging market economy) out to 2031/32, and the growing ratio reduces the sustainability of government finances. The deterioration in state finances projections extended to government’s debt-to GDP ratio too, at 74.7% this year, up from 74.1%, 75.5% in 2025/26 from 75.3% and 75.3% from 74.7% in 2026/27 (2027/28 75%).
The downward revision to revenue (and economic growth forecast this year), and upwards revisions to expenditure have been responsible for the widening of the fiscal deficit and borrowing projections.
There were expenditure increases on state-owned enterprises debt repayment, public service and most functions of government. The revenue revisions show a drop of about -R15 billion this year (2024/25), while expenditure rises by a hefty R26bn, widening the budget deficit by -R41bn, and contributing to higher borrowing. Economic growth is seen at 1.1% y/y this year from 1.3% y/y in February, no lowering of the inflation target occurred.
The MTBPS notes on its higher expenditure projections “special adjustments are included for the repayment of debt to Sanral and appropriations to the Presidency, the Department of International Relations and Cooperation and the Department of Justice and Constitutional Development in legal costs for South Africa's case in the International Court of Justice.
These in-year adjustments also contain emergency funds related to the South African National Defence Force troop deployment in the Democratic Republic of the Congo.
“The remaining upward expenditure adjustments are for rollovers, defence troop deployment, unforeseeable and unavoidable expenditure and spending announced in the 2024 Budget, including an increase in the Covid-19 social relief of distress grant. An amount of R60 million is also added for costs related to the initial activities of South Africa's G20 Presidency in 2024/25. In addition, R2.6 billion is included for self-financing from the revenue-generating activities of departments”.
In addition, “unforeseeable and unavoidable adjustments dedicated to support the rebuilding and rehabilitation of infrastructure damaged by floods across multiple municipalities and provinces. Similar support will be provided through the provincial roads maintenance grant for road reconstruction. Other adjustments targeted at infrastructure include a top-up of the emergency housing grant to fund current shortfalls and historical outstanding interventions.”
“These increases are partially offset by declared unspent funds, projected underspending, drawdowns of the contingency reserve and provisional allocations not assigned to votes. Details on in-year spending adjustments for national departments are set out in the 2024 Adjusted Estimates of National Expenditure.”
For 2025/26 and 2026/27, the revenue revisions show a drop of about -R19.1bn, while expenditure rises by a substantial R65.5bn.
“Economic development is the fastest-growing function, with growth averaging 7.8 per cent over the MTEF (Medium-Term Economic Framework) period driven by increased infrastructure allocations. Debt-service costs grow at an average of 6.9% per year.”
Expenditure on economic developments is a positive outcome, supportive of economic growth, although the sub-category with the largest growth rate is on economic regulation and infrastructure, at 10.9% annual growth between 2024/25 to 2027/28.
A massive jump in expenditure on regulations, and so more onerous regulatory environment is a disincentive for investment, while cutting red tape, and regulatory complexity would be a distinct positive in comparison.
However, most important for investors is the reward versus risk on their investment, and a weak economic growth environment is not encouraging for foreign direct investment, with South Africa’s growth rate seen below 2.0% y/y until 2028 in National Treasury’s projections.
Overall, the budget is slightly more credit negative on the deterioration in the projected fiscal ratios (debt nears R7 trillion by 2027/28), but unlikely to result in a credit rating downgrade, but ongoing fiscal slippage, particularly in the February Budget next year would risk negative outlooks for South Africa.
Annabel Bishop is the chief economist at Investec.
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