By Albert Botha
Politicians everywhere are famously good at making promises - or making statements that sound suspiciously like commitments.
Yet, when it comes to budget time, the public gets to see where the focus truly lies. This is because budgets are about more than money; they are a statement of a nation's priorities.
2024 has already been a watershed year for politics in South Africa.
It is potentially the biggest political sea change since 1994, and the upcoming Medium Term Budget Policy Statement (MTBPS) will be one of the first opportunities we have to see how this will impact our government's spending and goals.
All budget documents are dense compositions, thick with numbers and charts, but they come down to three major questions:
- How much money is the government collecting, how, and what changes can we expect?
- How much money are they spending, where, and will there be any changes?
- How much will the government need to borrow to balance the first two?
Or to put it differently: revenue, spending, and borrowing.
Thus far in 2024, there has been a slight underperformance in revenue collection, around R15bn (or 0.2 – 0.3% of GDP).
This was driven by a combination of different factors, including lower import VAT collections resulting from a stronger Rand, lower personal income tax, and general fuel levy.
This is expected to be mostly unwound by the end of the fiscal year (February 2025) due to a combination of higher spending in the holiday season and additional tax receipts from the introduction of the two-pot system.
There was also an injection of R100bn from the South African Reserve Bank's Gold and Foreign Exchange Reserve Account (GFECRA) into the National Revenue Fund.
This was done primarily to reduce government borrowing and debt service costs. There are two more payments planned, with R25bn in 2025 and R25bn in 2026.
On the expenditure side, they are running slightly ahead of budget, but it is typically in line with historical ratios for this time of the year.
Going forwards there are a number of new potential policy considerations or changes to existing policies that have been highlighted by economists.
The widely popular Social Relief of Distress (SRD) grant may be extended indefinitely, with some already including it in their baseline projections. Further support for state-owned enterprises is also likely, with Transnet potentially benefiting from such an allocation.
Whether this is palatable to the market will depend on the quantum of the allocation and the terms thereof. Continued support for Eskom is also likely, regardless of their recent success in combating loadshedding.
Cost-cutting and efficiencies are also going to be a major focus of the mini budget, but it is likely that this will be paired with a greater focus on Public-Private Partnerships (PPPs).
Reducing the debt and administrative load on governmental entities by insourcing private entities is likely to be a continued focus in South Africa.
The ongoing success of private power production is a prime example of how this can work – greater power generation investment from constrained state resources.
The same is on the cards for Transnet, yet the implementation has been somewhat slower than anticipated.
Contracting prominent international companies to run segments of our transportation infrastructure is likely to meaningfully benefit South African companies by reducing friction and increasing certainty.
The gap between spending and earning/revenue needs to be made up with borrowing, and it is here that some of the biggest strides are expected.
The last budget in February 2024 saw South Africa at a debt-to-GDP ratio of 73.9%, up from less than 60% prior to 2020.
The rate of debt accumulation has been a concern over the last couple of years, but looking forward, the expectation from most economists is that the rate of accumulation will slow and then peak at between 74-76% of GDP over the medium term.
Stabilising the debt position has been a goal of almost all the previous budgets of the last 15 years and is yet to be realised.
All of this results in a narrowing fiscal deficit of between 4.3 – 4.5% of GDP in 2024/25, with the expectation that primary budget surpluses follow from there in the medium term.
There are, however, some glimmers of light. Inflation in South Africa is firmly under control and did not spiral like in most developed markets.
The Government of National Unity is clearly making headway in some areas, and this is reflected in improved national sentiment along with an improved economic outlook – the Bureau for Economic Research at Stellenbosch currently has a real GDP growth forecast of 2.2% for 2025, which, if realised, will be the highest number outside of the COVID recovery since 2015.
The MTBPS will likely be tough, as will many in the next couple of years, but if the country is truly turning a corner, then this budget may be one of the first signs.
Albert Botha is the head of fixed income at Ashburton Investments.
BUSINESS REPORT