National Treasury delivered the Medium Term Budget Policy Statement (MTBPS) in a very challenging global and domestic economic environment when fiscal space has been eroded. An intensification in geopolitical risks and slower global growth and trade, have amplified a very difficult economic environment at home. The deterioration in fiscal space emanating from the revenue side, with the intensification of the electricity and the logistic crisis and a tighter monetary policy, was not anticipated in the February budget forecasts. The expenditure forecast was incomplete from the start due to the outstanding issue of the public sector wage increase. A less inverted US yield curve, with US 10yr Treasuries rising to 5.0%, more monetary policy tightening from the SARB, and an increase in the fiscal risk premium, have combined to increase the average funding costs from 8.3% in February 2023 to 9.5% in October 2023.
Where were the surprises for F23/24?
- SAGB and ILB supply is unchanged: The main budget deficit will rise from 3.9% of GDP to 4.7% of GDP. This is marginally better than ICIB’s forecast of 4.9% of GDP but well below the more bearish forecasts of 6.0% of GDP. The shortfall in revenue receipts has been in line with market expectations of R56bn (ICIB R50bn) but the net increase in government spending of R10.4bn (non-interest spending is reduced by R10.4bn countered by an increase in debt servicing costs of R14.0bn to R354.5bn) has been materially lower than even ICIB’s more “bullish” estimate of R18.0bn and bearish predictions of ¬R40bn. Bond supply is left unchanged vs market expectations of an increase.
National Treasury’s intervention to avoid a fiscal cliff
- National Treasury focused on fiscal consolidation as core spending was revised lower to counter a rising public sector wage bill (R23bn in F23/24), with carry-through implications of nearly R60bn over the MTEF period, and a fast-growing debt servicing cost bill over the MTEF period (+R65.6bn). Net spending has been reduced by R88.7bn over the MTEF period. National Treasury has protected layouts in health, education and police. However, financial bailouts to SOEs such as Transnet and other SOEs (the Post Office, SABC and others) have not been included, which continues to dent the credibility of the expenditure outlook. A revenue shortfall of R56bn in revenue receipts in the current fiscal year has lowered the trajectory of the MTEF period by a massive R178.2bn. However, financial bailouts to SOEs such as Transnet and other SOEs (the Post Office, SABC and others) have not been included, which continues to dent the credibility of the expenditure outlook. A revenue shortfall of R56bn in revenue receipts in the current fiscal year has lowered the trajectory of the MTEF period by a massive R178.2bn.
- Crowding out effect from a rising debt servicing cost bill
The revision in debt servicing costs of R65.6bn in F23/24, F24/25 and F25/26 to R455.9bn by F26/27 is of major concern. The increase can be ascribed to an increase in the main budget deficit, funding costs and the reclassification of Eskom’s debt relief package of R254bn as a loan at market rates instead of in one term.
- Higher sovereign risk premium: Treasury has increased its sovereign risk premium forecast to 3.9% (3.8%), 4.1% (3.6%), 4.0% (3.6%) and 3.9% from 2023 to 2026. The SARB is also concerned about the increase in the country risk premium, as this impacts the real neutral policy rate, raising the risk of a shallower rate-cutting cycle in 2024 and 2025. The real neutral repo rate has risen to ~2.6% from 2.4% in 2024.