South Africa’s economy appears to be on a more confident trajectory than it was before the national elections in May, with the successful formation of the Government of National Unity (GNU) combining with lower inflation and an improved power supply to boost consumer confidence.
All eyes will be on Finance Minister Enoch Godongwana as he delivers his Medium-Term Budget Policy Statement (MTBPS) on Wednesday, October 30, with key areas to watch including local and provincial budget allocations as well as security and water infrastructure.
However, it is essential that government continues to cut spending, says Waldo Marcus, marketing director at TPN credit bureau.
“This will help reduce the deficit and work towards achieving a better credit rating from international agencies, ultimately lowering the cost of South Africa’s debt.”
While the FNB/BER Consumer Confidence index achieved its highest reading since the third quarter of 2019, consumer spending remains constrained.
According to Debt Busters, real disposable income has fallen by 44% since 2016, while its second-quarter Debt Index Report shows consumers spend 62% of their income on debt repayments.
Thankfully, inflation is on a downward curve at present, with Consumer Price Inflation (CPI) having dropped to 3.8% in September, from 4.4% in August and 4.6% in July. This means CPI is now at its lowest level since March 2021.
As a result of this more positive inflation outlook, the Reserve Bank has commenced with its rate cutting cycle, with a 25 basis point cut in September, and a further reduction in interest rates is expected in November.
However the impact of these cuts is only expected to be felt in 2025, Marcus said.
With household disposable income remaining under pressure, many have taken advantage of the ‘two-pot’ reform to make early withdrawals from their retirement savings. For instance, within 20 days of the rule change taking effect on September 1, Sanlam Corporate had received over 66,000 claims, up from its usual 8,000 per month.
“While the Reserve Bank expects that the reform will boost the economy over the next two years, the long-term implications for retirement savings, particularly the ability of retirees to afford accommodation in their twilight years, remain to be seen,” Marcus said.
The public sector wage bill remains a risk to government finances going forward, with trade unions having demanded a 12% wage increase for the 2025/2026 financial year, while government appears to have budgeted for around 4.5%.
“Economists have warned that above-inflation salary increases that don’t align with productivity growth will fuel inflation. South Africa’s public sector employees are among the best paid in the world,” Markus said.
“The public sector wage bill accounts for more than 30% of the country’s budget and is the third highest government wage bill as a share of GDP compared with 20 major global economies, according to the Centre for Risk Analysis. High public sector wage increases places significant pressure on the fiscus which is already under strain as a result of high debt servicing costs.”
Economists are hoping to see a continued commitment to cost-cutting measures in the medium-term budget to stabilise the debt-to-GDP ratio, Markus added.
“While the economy is showing encouraging signs of recovery, economic risks remain. Although the recent interest rate cut offers some relief for consumers, it will be important to monitor its long-term impact on the economy, household finances and retirement savings.
“The upcoming MTBPS will be an opportunity to assess how effectively government is managing its finances and how realistic its 3% per annum GDP growth target is – or if the IMF is closer to the mark with a growth forecast of 1.1% for 2024 and 1.5% for 2025?”
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