Citadel’s Chief Economist, Maarten Ackerman and Chief Investment Officer, George Herman weigh in on the 2023 National Budget, and the impact of increased borrowing to cover the Eskom bailout and social spending in the absence of raised taxes.
While the 2023 National Budget brings some relief to cash-strapped citizens, new fiscal pressures brought on by the Eskom and cost of living crises, and caps on taxes do put the country at risk of spiralling debt if real economic growth is not achieved this year, the wealth experts at Citadel are cautioning.
Citadel Chief Economist and Advisory Partner, Maarten Ackerman, has mixed feelings about Finance Minister Enoch Godongwana’s budget. “Whilst it is a good budget considering the situation we are in, there is significant downside risk ahead.”
INCREASED RISK OF A DEBT SPIRAL
“We are in a tight corner and if we don’t stimulate growth, South Africa will come dangerously close to another debt spiral, like we experienced a few years ago, and with interest rates much higher this time around, it’s really not a good position to be in, in terms of the potential downside risk,” says Ackerman.
This risk has to be seen in the context of the South African government’s debt servicing costs having increased to R1-billion per day.
“Given everything that has been announced, including adjusted social grants and supporting Eskom, government’s debt has to increase significantly, especially if tax rates remain unchanged. This move was made on the assumption of a growth number for 2023 that is three times higher than that which the South African Reserve Bank pencilled down during the first monetary policy meeting of this year. Government is quite optimistic about potential growth and that is a major risk to the fiscal outlook, because if we don’t achieve this projected growth, a lot of the assumed metrics will look even worse and we won’t be able to reach some of the economic objectives that the government announced today,” says Ackerman.
ECONOMIC RELIEF WELCOMED
Ackerman acknowledges that it was a balanced budget in terms of the government trying to take care of lower income groups in line with rising inflation, as well as invest in infrastructure development to boost jobs and growth. “That said, it is an election year in 2024 so it is to be expected that there will be some focus on the electorate.”
Ackerman is however quick to add that the incentives announced for solar energy generation were “quite small” and more could have been done to give homeowners, the renewable energy sector and the small business sector at large, the boost they all needed.
Ackerman believes the budget contains some good news for lower income and middle class South Africans. This includes the announcements that:
- the COVID-19 relief grant would be extended for another year,
- basic income grants would be almost doubled to meet inflationary pressures on the cost of living,
- the fuel levy would not be increased,
- the tax bracket would be adjusted to curtail “bracket creep”,
- the retirement lumpsum would be increased from R500,000 to R550,000,
- transfer duties would only be applicable to properties valued at R1.1-million or more.
Godongwana said government would be bringing the fiscal deficit down without resorting to tax increases or further cuts in social wages and infrastructure. For 2023/24, the government will provide tax relief of R13-billion to its citizens.
WHAT THE ESKOM BAILOUT MEANS FOR FINANCIAL MARKETS
Chief Investment Officer, George Herman, adds that it was “good to see that an Eskom rescue plan has been announced”. “The fiscus was blessed with revenue overruns and that has allowed Treasury to fund some of the difficulties that we have to face in our economy, of which the biggest one is our energy crisis.”
Herman says one of the most important outcomes of Godongwana’s budget is that it has given the market greater clarity and certainty about the government’s plan to address its Eskom debt. “The mere fact that we have some form of certainty as to government’s approach to the Eskom bailout is a major positive, despite it being a painful exercise. Initial currency and bond markets reacted positively but gave back some gains as the facts were digested. Pressure on bonds and the rand remains as we await the greylisting announcement on Friday.”
Herman however warns that the increased funding requirements for the government to finance the Eskom bailout will lead to “quite a bit of increased borrowing, so the pressure on the bond market remains if budget projections are not met”. In addition to this, if Eskom was to fail, the government would still be locked into repaying the loans it took to pay for the bailout. “Therein lies great risk to the fiscus,” says Herman.
The Citadel team was disappointed that Godongwana did not directly tackle the Transnet crisis in his speech. There are concerns that the State Owned Enterprise (SOE) will be unable to service the current demand on the freight system, as Transnet is still in the process of restoring damages from the floods of April 2022.
“However, all in all, the budget strikes a good balance between social spending and trying to fix the crises that the local economy faces. In essence it was a very realistic budget. However, as we’ve said previously, we need better execution on our economic policies and more support for the business sector to create jobs. We will never get out of the risky fiscal position we are in if we don’t enable more job creation,” says Ackerman.
Citadel hosted a webinar with Deputy Finance Minister David Masondo immediately after the National Budget speech. Click here to view it: https://www.citadel.co.za/in-the-know/