The heightened country risk premium for South African government bonds, coupled with the retreat of overseas marginal investors, has escalated the funding costs for the National Treasury. Incoming exchequer data on government spending points to potential overruns, despite the Medium-Term Budget Policy Statement (MTBPS) 2023's efforts at fiscal tightening. The strategy involved reducing baseline expenditure to accommodate an increased public sector wage bill. Furthermore, lacklustre economic growth is adversely affecting tax revenues, and a rising tax burden on individuals contributes to a steady uptick in the effective tax rate. These factors suggest that the government has limited fiscal flexibility, especially within a growth context of just 1.3% in 2024.
The government's priority is likely to remain on fiscal consolidation throughout the Medium-Term Expenditure Framework (MTEF) period. However, the threat of a fiscal cliff, with a persistent rise in debt service costs, lingers unless there is an upturn in the growth trend.
Within this context, the Budget Review 2024 presents an opportunity for the government to communicate a message that can positively influence investor and business confidence, thereby playing a crucial role in restoring South Africa's attractiveness as an investment destination.
- Minor deviations from MTBPS 2023 projections are expected for F23/24 and F24/25. Our baseline forecast shows only small changes to the outcome of the main budget deficit in F23/24 (R330bn to R341bn and 4.7% to 4.9% of GDP) and a small deterioration in F24/25 (R331bn from R322bn and 4.4% vs 4.3% of GDP).
- The gross debt-to-GDP trajectory is expected to rise to 78% of GDP by F26/27 (MTBPS: 77.5%).
- The financing strategy is challenged by the high cost of funding arising and the issuance of low coupon and mid-long and long dated bonds. The funding mix could include an increase in net T-bill issuance, another rand Sukuk bond and more FRNS. An increase in SAGB and ILB issuances could be avoided if switch auctions are undertaken of the I2025 that mature in January 2025.
Key issues we are watching
- Infrastructure financing and Public Private Partnerships
- Gold and Foreign Exchange Reserve Contingency Account (GFECRA)
- Expenditure and reconfiguration of the state
- Fiscal anchor
- What is the tax increase going to look like
- Two-pot pension system
- Funding strategy