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With the euphoria of the historic fourth Rugby World Cup for the Springboks still filling the air, the Medium-Term Budget (MTB) announced by the Minister of Finance, Enoch Godongwana on 01 November 2023 brought South Africans firmly back to the harsh realities that we face as a country. The purpose of the Medium-Term Budget was stated as being a means to avoid a fiscal crisis and systemic risk for the South African economy.

While some of the most important issues were mentioned by the Minister of Finance, the MTB did not leave the market convinced that it would result in the government achieving these noble objectives. In addition to the local economic challenges, the world economy is also facing lingering concerns about inflation and elevated levels of interest rates, the prospects of a possible US economic recession, a stuttering Chinese economy and the crisis in the Middle East. This, together with a strong US Dollar, lower commodity prices and the risk of a potential spike in oil prices, will make it difficult for the local economy to flourish and address the fiscal, social and employment needs of the country.

Features of the Medium-Term Budget 2023

The following are key statistics from the Medium-Term Budget:

  • South African economic growth of 0.8% expected for 2023 (0.1% lower than projected during the 2023 Budget in February) and economic growth of 1.4% for both 2024 and 2025;
  • An increase in the main budget deficit of R54.7 billion compared to the 2023 Budget as a result of lower revenue, a higher wage bill, and higher debt-service costs;
  • A deficit of 4.9% of GDP, compared to the 2023 Budget estimate of 4% of GDP;
  • Average government borrowing of R553 billion per annum to cover annual budget deficits in years to come;
  • An increase in gross government debt from R4.8 trillion in 2023/24 to R6 trillion in 2025/26;
  • Gross government debt to stabilise at 77.7% of GDP in 2025/26;
  • Debt service costs to increase from 20.7% of government revenue to 22.1% by 2026/27;
  • Interest on debt will amount to R385.9 billion for 2023/24 alone.

The Good, the Bad and the Ugly

The Medium-Term Budget (MTB) contained elements of hope, déjà vu and despair. The blockbuster movie released in 1966: The Good, The Bad and The Ugly, featuring Clint Eastwood, provides a good analogy for the MTB. So what was the Good, Bad and Ugly from the MTB 2023?

The Good:

  • Planned actions to review and reconfigure the structure and size of government;
  • New mechanisms for government to fast-track the approval of capital spending projects;
  • A review of government’s fiscal policy with more details to be announced during the 2024 Budget;
  • Recognition by government that service delivery is failing at national and municipal level as well as the economic impact of existing logistical and infrastructure challenges;
  • Acknowledgement and addressing of climate change risk by means of a green strategy;
  • Increased alternative energy solutions and progress at Eskom that will result in less loadshedding that is hampering economic growth;
  • Greater involvement of the private sector in infrastructure investing through the creation of an Infrastructure Finance and Implementation Support Agency;
  • Tougher conditions for further debt relief for Eskom through the Eskom Debt Relief Amendment Bill;
  • Better co-ordination, higher standards and greater transparency in terms of government procurement through the Public Procurement Bill that will seek to limit corruption;
  • The goal to address challenges related to organised crime and illegal financial flows and to comply with the requirements of the Financial Action Task Force (FATF) by 2025;
  • Improvements to the legislative environment in areas related to financial management and financial governance in response to recommendations of the Zondo Commission, the Mpati Commission, and the Nugent Commission;
  • No additional allocations or bailouts by government for State Owned Enterprises.

The Bad:

  • Lack of a credible track record to implement more plans to reform the economy and stimulate growth;
  • Additional provisions for the Covid-19 Social Relief of Distress (SRD) grant of R350 per month that is expected to become a permanent feature in the form of a Basic Income Grant, which will put further strain on the fiscus in years to come;
  • Planned spending cuts of only R154 billion from a total expected spend of R6 trillion by government in the next three financial years;
  • Fixed investment growth expected to slow significantly in 2024, before stabilising at 3.4% of GDP by 2026;
  • Writing off municipal debt owed to Eskom over the next three years totalling R56.8 billion based on applications by the municipalities which will not assist in addressing the non-payment culture;
  • Propose tax measures in the Budget 2024 to raise an additional R15 billion in revenue for the 2024/25 fiscal year to offset the current underperformance of revenue collection.

The Ugly:

  • Rapidly growing government debt and debt servicing costs which comes as an opportunity cost to the South African economy in terms of addressing infrastructure, poverty, health, security and unemployment challenges;
  • The impact of deficiencies in South Africa’s logistics system (specifically rails and port) on the local economy with rail infrastructure underperformance costing the economy 5% of GDP in 2022 and losses of around R50 billion in the minerals sector alone.

The Way Forward

Likening the South African fiscal situation to a sick patient, the question can be asked whether we find ourselves in the emergency room, intensive care unit or critical care ward. While there is still hope to turn the growing South African fiscal crisis around, it will take more than hope and a real focused, committed and dedicated plan that harnesses the willingness, collaboration, skills and resources of all stakeholders. Challenges that remain include the ability to grow revenue collection on the back of a slow-growing economy, additional financial support required by state-owned enterprises and a possible credit rating downgrade for South Africa that will result in higher debt servicing costs.

The ruling political party has its back against the wall due to years of mismanagement, corruption and bad policy decisions. With 2024 looming as an election year, one could not realistically expect government to produce the hard but necessary shift and decisive actions required to address some of the fiscal challenges we face with the Medium Term Budget 2023. This would suggest that South Africa currently faces more of a political challenge than a fiscal challenge. The outcome of the 2024 elections is increasingly becoming a critical part of the equation in addressing the growing fiscal crisis we face as a country over the medium term.

About the Author

Johan Gouws
Head of Advice, Sasfin Asset Consulting

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