Citadel’s top investment and economic analysts unpack the Finance Minister’s maiden Medium-Term Budget Policy Statement (MTBPS).
New Finance Minister, Enoch Godongwana, delivered his first Medium-Term Budget Policy Statement (MTBPS) on Thursday and, while there were no major surprises, experts at wealth management specialists, Citadel, believe there are certainly areas to take heed of.
Says Maarten Ackerman, Chief Economist at Citadel, “When looking at the economic growth projections, it’s almost as if government doubts that their reform initiatives will be fast and efficient enough to support higher and more sustainable growth. They keep talking about reforms and transformation to get the economy going, yet the average gross domestic product (GDP) forecast for the next three years is a meagre 1.7% per annum. At that number, we would be underperforming compared to the rest of sub-Sarahan Africa and our emerging market peer group. Hopefully, government is trying to under promise and overdeliver. Since slotting in much higher growth numbers might conceal the real fiscal challenges ahead.”
Chief Investment Officer, George Herman, says it was interesting to note that Godongwana seemed to be disassociating himself from National Treasury when, in fact, he is delivering the MTBPS as the Head of National Treasury. “It is pleasing that the minister acknowledged that the commodity tailwind we’ve experienced this year is not sustainable, and that we have structural issues that require reform as that tailwind begins to turn.”
Below are the key insights to make note of.
THE DEFICIT-TO-GDP ONLY LOOKS GOOD DUE TO OVERRUNS AND BASE ADJUSTMENT
South Africa experienced a revenue overrun of R120 billion, which was expected. Earlier this year, there was a revision upwards of GDP numbers, increasing the size of the economy by more than 11%. “The deficit to GDP looks good because of revenue overruns in conjunction with the GDP base. Debt-to-GDP also somewhat improved but, alarmingly, within two years it’s back to the 80% level, leaving it on a slippery slope,” says Ackerman. “The numbers indicate that South Africa is going from strong growth this year at 5.1%, in line with our peers, and then suddenly falls flat,” he adds.
DEBT SERVICE COST IS CONCERNING
Debt service costs remain an issue as it’s the fastest growing component in the budget at 10.8% per annum. The pressure on social spending leaves no room to consolidate debt. Debt repayment costs on R4 trillion of debt are expected to increase from R269.2 billion this financial year to R365.8 billion in 2024/25. This amount is higher than the health and police services budgets combined, meaning critical service delivery is being forfeited to repay national debt. Furthermore, an amount of R3.9 billion went towards the South African Special Risks Insurance Association (SASRIA). Godongwana affirmed that debt was South Africa’s fastest-growing expenditure line item.
STRUCTURAL REFORM > ECONOMIC GROWTH
“With 46% of the population on social grants, this is a growing crisis. Government is spending R1.1 trillion per year on grants alone, showing the dire need for South Africa to urgently address structural reforms,” says Ackerman.
This could be a permanent, if not growing, crisis. And key to these reforms is bringing in additional electricity supply – something South Africans have been hearing about for the past three years, with very little results despite changes being implemented.
PUBLIC SECTOR WAGE BILL MORE THAN ANTICIPATED
Says Herman, “Allocations for wage bill adjustments were R20 billion higher than expected, indicating that the government didn’t succeed in pushing back and are now cramming to source funds to cover future wage negotiations.”
Fiscal outlook remains uncertain, and risks include the sustainability of the economic recovery, future wage negotiations, as well as the legal processes associated with public-service compensation.
QUESTIONING STATE-OWNED ENTERPRISES (SOEs)
Analysts reacted positively to the fact that the new minister is questioning if all the SOEs are necessary, just as Mboweni did in February. The minister noted that, since 2013, R290 billion had been poured into bailing out state-owned enterprises, saying, “Going forward, the restructuring of state-owned companies, informed by an assessment of their strategic relevance, is a priority.”
From an investment point of view, the minister reiterated that SARS was being bolstered by the hiring of specialist tax auditors, as well as data scientists, to improve tax collection. Although not mentioned in his statement, the last couple of days have seen the recent proposals for taxation of retirement funds, specifically for people who have emigrated from South Africa, being withdrawn to be reworked. Godongwana also mentioned that new rules pertaining to pension funds would be announced in February as these would require legislative changes and had to be linked to taxation laws.
Godongwana said that spending will remain restrained over the next three years to avoid the widening of the budget deficit, but calls on the private sector to do their part in taking the economy to beyond pre-pandemic levels. It was evident from the statement that Godongwana has a keen awareness of the challenges facing South Africa and the urgent need to implement key structural reforms if the country hopes to achieve meaningful growth and economic stability.
In summary, Citadel experts believe this was a realistic MTBPS that contained no positive or negative surprises. It would appear the finance ministry and Treasury are sticking to policies implemented by Mboweni and that, at least for now, it is business as usual for the ministry and South Africa.
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Written by: Maarten Ackerman, Chief Economist, and George Herman, Chief Investment Officer at Citadel