South Africa’s finance chief to manage costs and debt wildcards in budget

(Bloomberg) – South Africa’s Finance Minister Enoch Godongwana is under pressure to show that efforts to reduce the country’s budget deficits and get the debt under control will not be jeopardized by new spending measures in the budget. this week.

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Godongwana will present the government’s spending framework for the next three years on Wednesday as the economy struggles to recover from the damage wrought by the coronavirus pandemic, including South Africa‘s discovery of the omicron variant that sparked a wave of restrictions on international travel. It was also hampered by deadly riots and electricity supply constraints.

High commodity prices have given it some leeway. This windfall means that revenues are on track to exceed estimates and the budget deficit is likely to shrink faster than expected. Yet investors will look to the economic transformation chief of the ruling African National Congress to downplay the long-term risks of expanding social safety nets, hotly contested public sector wage negotiations and public service d electricity, Eskom Holdings SOC. ltd.

A potential slippage in the government wage bill, a larger and more permanent form of basic income support and additional bailouts to fragile state-owned enterprises remain the main risks to fiscal consolidation and debt stabilization in the medium to long term. term, Momentum Investments analyst Sanisha Packirisamy said in a note.

What Bloomberg Economics says…

“Better than expected revenue collections will once again improve South Africa’s fiscal parameters when Finance Minister Enoch Godongwana tables the national budget. But the country is not off the hook – a debt crisis threatens if the government chooses to increase spending without a credible strategy to accelerate the pace of growth.

— Boingotlo Gasealahwe, Economist for Africa

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Of 16 economists in a Bloomberg survey, 81% believe President Cyril Ramaphosa’s latest extension of a monthly subsidy for the unemployed, first introduced in response to the pandemic, will become permanent. Almost two-thirds of survey participants see the country introducing a Basic Income Allowance ahead of the 2024 national elections.

Tax measures

A permanent expansion of the social safety net means the government will have to consider more borrowing and raising taxes or postpone plans to cut the corporate tax rate.

This could further erode the tax base in a country where personal income taxes, paid by around 7 million people, contribute 40% of total tax revenue. It would also weigh on economic growth, which is unlikely to exceed 2% over the next two years, according to a separate Bloomberg survey.

Ten out of fifteen economists do not see Godongwana following up on his predecessor Tito Mboweni’s plan to cut corporate tax by one point to 27% from April. Firms such as PwC and ENSafrica said in their forecasts last week that the minister may only announce a cut in the corporate tax rate in the 2023 budget because the introduction of measures to broaden the tax base has been delayed to give the economy time to recover from the impact. of the pandemic.


The failure to reach a new three-year pay deal with labor groups that represent about 1.3 million public servants could also increase spending pressures. The talks which could continue until March next year mean that the National Treasury will have to continue paying state employees cash bonuses which could cost more than its annual estimate of R20.5 billion ( $1.4 billion), according to survey participants.

The Treasury will not put additional costs in the budget so as not to “speed up” wage negotiations, Sisamkele Kobus, fixed income analyst at Ninety One, said in a note. A spending slippage of at least 184 billion rand, of which about two-thirds will be for social benefits and the rest for public sector wages, is likely over the next three years, she said.

The expected improvement in the country’s medium-term debt profile could also be derailed if the state decides to take over some or all of Eskom’s R392 billion debt.

The increase in public debt and the cost of servicing it, the fastest growing budget item since 2011, are major risks and the transfer of Eskom’s bonds to the state balance would lead to a deterioration marked by public finances.

Until “the outlook for economic growth can be raised in a sustainable way, it is difficult to see how the fiscal situation can improve over the medium term,” said Gina Schoeman, economist at Citibank South Africa. “A short-lived commodity cycle – even if it lasts two years – that generates a revenue windfall cannot be offset by ongoing spending in other areas.”

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