Anyone perusing the financial section of the newspaper would have picked up on the fearmongering that South Africa is headed for a fiscal cliff, yet again. While the fiscal position is certainly fragile, we do have a little breathing room. Even so, tough decisions must be made, being particularly difficult heading into an election year.
The Medium-Term Budget Policy Statement (MTBPS) has at times served as a policy preview for the main budget and at others merely as a mark-to-market on government finances. In this sense we do not think the MTBPS will be a make-or-break budget, rather leaving the tough choices for February. Nevertheless, there are key markers to monitor this week.
The consensus expects the budget deficit to widen from 4.0% of GDP to around 5.5%. Anything below 5.0% would be a positive surprise, even if not entirely believable, while a print approaching 6.0% or above would be a notable negative surprise.
Lower export prices, mounting spending pressures, Transnet’s failures, and Eskom’s bailout have put renewed pressure on the debt ratio. In February, Treasury expected the debt ratio to peak at 74% in FY25/26 and to moderate sharply thereafter. We do not think this will be a realistic projection for the MTBPS, with the revised peak set to be closer to 76% – 78% and some risk that there is no meaningful improvement in the longer term. A debt projection of 80% or above would alarm the market and bring into question the intension to consolidate.
Populist pressure in the lead up to the 2024 elections will most likely result in the conversion of the Covid-19 Social Relief of Distress grant. It is not clear whether it will happen as early as this week, but a basic income grant implies dwindling cyclical revenues must fund structurally higher spending.
Ongoing SOE bailouts that have proven unproductive will be in focus given the news flow around Transnet potentially needing R100bn in government financial support. It is highly unlikely that this funding will be committed in the MTBPS, but we would not be surprised if the February budget delivers a formal, albeit partial, support package. Transnet is not the only SOE asking for money and populist pressure amid lofty promises still leave the National Health Insurance unaddressed.
Finally, investors and consumers must gauge how government intends to balance its books. Bond investors would be concerned by even higher issuance in the local market, while equity investors would see further tax rate hikes as another squeeze on the already overburdened consumer.
In short, the MTBPS will be another round of tough choices and many trade-offs.
Carmen Nel is Head of Multi-Asset at Terebinth Capital and Manager of the Amplify SCI* Strategic Income Fund and Amplify SCI* Diversified Income Retail Hedge Fund.