MTBPS 2025: Gold’s fiscal glow

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00:00 – Introduction

Jeremy:  Hello everybody, and it's been by any measure, a year of fiscal theatre here in South Africa. Now you'll remember the drama began in February when the Budget Speech was nearly upstaged by the birth pains of a coalition government. Since then, though, focus has shifted from political compromise to economic consequence, and the Treasury must now navigate a landscape where consensus is fragile, but also essential. Now, the Mid-Term Budget Policy Statement, or as we know it better, the mini budget is ostensibly a midyear checkup on the health of the country's finances. Now, it lands on the 12th of November at a time when the country's fiscal story is teetering between risk and resolve. Government debt remains a huge concern and consensus growth expectations remain low. Markets are scanning for signals. Will this administration stay the course of fiscal consolidation, or is it going to bow to the pressures of populism?

I'm Jeremy Mags. This is No Ordinary Wednesday. It's Investec fortnightly podcast where we unpack and discuss the forces shaping South Africa's economy and financial markets. In this episode, to discuss the mini budget, I've got three experts with me from Investec, chief economist, Annabel Bishop, along with Treasury economist, Tertia Jacobs, and investment strategist Osa Mazwai - to all three of you, a very warm welcome.

01:27- How important is the 2025 Mid-Term Budget Policy Statement (MTBPS)?

Jeremy: Tertia let's start with you. It's worth noting that this is the first budget cycle under the coalition government. So maybe we'll start with a little bit of context and framework. How has the process changed since the first half of the year? And maybe just bluntly, how important is this mini budget?

Tertia: Thanks, Jeremy. I think your introduction was spot on right, after the three starts in the beginning of the year. I think the dynamic here is that under the ANC when it was the dominant party, there was a very short time between when the budget was presented to cabinet by National Treasury and then it was presented by the Minister of Finance. So, what's happened this time around, is that there has to be more consultation. So, there's been quite a long runup and that is going play out on the 12th of November to socialise the numbers with the various committees and then when it will be presented to the cabinet. So, there will be consensus going into the 12th so that we don't have a repeat of February. The second point is, I think, which is very important, and that comes back to the May budget that there was consensus that fiscal consolidation is absolutely critical, so we need to stabilise debt-to-GDP ratios. So, it means if there's higher expenditure, it has to be financed by tax increases. So, I think that is going to shape the budget that we are going to see on the 12th. So important then, I think, there is agreement and commitment to fiscal consolidation.

02:51 – What’s behind the debt-to-GDP ration divergence?

Jeremy: So, Annabel let's get into the details now of the task ahead for the finance minister. Treasury expects the debt-to-GDP ratio to peak at just over 77% this year, but both the IMF and the ratings agency see it climbing even further. Maybe tell us what is behind the divergence.

Annabel: I think we find ourselves in a situation where we've had many years of fiscal slippage, and by that we really mean that National Treasury has put out a certain set of projections for our debt-to-GDP ratios and then of course they haven't been met, and they've been revised higher. This has provided an issue where there is some expectation that there could continue to be fiscal slippage. But the main reason I think is perhaps differences in GDP growth forecasts. So, we have seen stronger growth forecasts coming from National Treasury than we have seen from some of the other agencies you mentioned. But I think the bottom line is - does this translate through into stronger economic growth? And that's really where we see the differential here to answer your question. So, I think, from that perspective, we obviously have seen an improvement in South Africa's economic growth this year compared to expectations. The perhaps slightly unpredictable agricultural component has been a huge driver of South Africa's economic growth. But really key to note is that we have found the delay in the implementation of US tariffs as being one of the key factors why we've revised our GDP growth forecast up a little bit this year, because obviously there’s less impact than it would've been say if it all came in April, for example. And of course, as we move into next year, there will still be an impact there. Overall, at 77% of GDP it is still not a sustainable ratio deemed for an emerging market, that's really seen at 60% or less. Of course, as well for the credit rating agency, some of them actually include other forms of debt as well such as the impact of government guarantees on the overall debt-to-GDP ratios, because obviously the government in South Africa guarantees these SOE debt burden and of course would have to and has been taking some of it onto its balance sheet. Overall, we are hopeful that economic growth will be quicker than expected than the forecast obviously next year, and that should help to reduce this burden. But lastly, I just wanted to add that, we've seen the South African government bond yield drop below 9%, and that also will have an impact. It reduces borrowing costs. So overall, there is this divergence because the reasons I mentioned, but we do hope that fiscal slippage now starts to come to an end with the government of national unity.

05:03 – How closely are markets watching South Africa’s debt challenges?

Jeremy: So Osa let me bring you into the conversation following those remarks then from Annabel. Obviously, markets are watching South Africa's debt challenges very closely.

Osa: Annabel has mentioned the kind of performance we've seen in our bond market in particular, and there've been quite a number of drivers why we've seen bonds decline, to the extent to which they have. You look at 18 months ago, bond yields were above 12% around the elections last year, and then you've seen a rapid decline to 9%. And there's a couple of drivers related to inflation risk premiums, political risk premiums, and also the fiscal risk premium. From a fiscal risk perspective, Annabel has covered the fact that growth is going to be at the centre. You’ll remember, at the time of the budget, the very first budget, national Treasury pencilled in 2% growth. I think the market broadly thought that was very optimistic. That was revised down at the time of the final budget to 1.4%. As Annabel has mentioned, Investec has revised that growth forecast upwards, and there is scope for growth to surprise to the upside relative to the consensus forecasts in the market that are sitting at around 1%. But then again, then to Tertia’s point, you look at how sustainable our debt trajectory is. I suppose both Tertia and Annabel have mentioned that, and we are going to have to see that continued commitment to fiscal consolidation. There are some risks to the upside in terms of where debt ultimately stabilises. Largely also a function of where nominal GDP will settle this year due to a lower inflation environment. So those are the key things that we'll be looking for from a market’s perspective, and at the centre where growth settles and where do we go in terms of debt stabilisation and fiscal consolidation going forward.

06:40 – How does the debt trajectory intersect with SA’s long-term growth prospects?

Jeremy: Annabel, how then does this debt trajectory intersect with the country's long-term growth prospects? And I wonder if fiscal tightening can coexist with a credible growth agenda.

Annabel: I don't think we've really had fiscal tightening. Over the past few decades, we've actually had fiscal expansion and of course, you know what we're really looking to do is reign in both debt and the deficits. We mentioned the 60% ratio for debt - it's a 3.5% ratio for the fiscal deficit, obviously to also be seen as sustainable as well. And really what that means, the sustainability, if you don't have sustainable finances, if you keep on borrowing it and it runs away with you and it makes your economy unsustainable - you can eventually have a debt collapse. Reigning in the borrowing, especially on areas that are not seen as necessarily growth promoting, and that's really your fixed investment you need to preserve, but to cut back on current expenditure, that's really seen as a direction for this fiscal consolidation. I would be careful, that it's not really seen as onerous fiscal tightening. And I think, we've really seen that with the ANCs first few budgets that did push through this year. But we do expect going forward that this is going to dovetail also with a greater control around government expenditure. In other words, really looking for bang for back, looking for a situation where you obviously, where you do spend the taxpayers’ money, you actually get a good return from an economic growth perspective. And of course, this includes the retiring of senior civil servants and of course also dovetails with a lower inflation target. All in all, to try and bring the management of South Africa's economy overall to a more credible path so that we do not continue to see this debt trajectory escalate. It [debt] was close to 20% in the 2000s, it's now running towards 80%. The risk is that in a slow growth economy, how do you get to the point where you service your debt if we haven't had these benefits from increased investor appetite towards our bonds. If we were still at 12%, it just starts to weaken your overall fundamentals.

08:28 – Expectations from the minister on inflation targeting

Jeremy: So, Tertia pick up on inflation targeting. Then what are you expecting to hear from the minister?

Tertia: That's a very important question. As Osa mentioned, some of the drivers of this decline in bond yields has been the lower inflation risk premium. So, with the Reserve bank then announcing in May that they're going to target the bottom end of the target range of three to 6%. The market has started to buy in it. So, the inflation risk premium has declined. So, I think what is very important, just to give it more credibility, is that the Minister of Finance backs it up with a lower inflation target, say from two to 4%. What we have seen is that South Africa's target range is actually at the top end of most emerging markets. Over the past 20 years or so, most of the emerging markets have lowered their ranges, whereas ours have remained unchanged. So, I think that is a very important development that we will be monitoring because one of the big battles in lowering inflation is inflation expectations. So, if the government can embrace it, because it means broader buy-in, that will give impetus and support to the Reserve Bank.

09:35 – Osa would a lower inflation target risk dampening nominal GDP?

Jeremy: Osa would a lower inflation target then risk dampening nominal GDP growth and by extension perhaps worsen our debt ratios?

Osa: Yes, absolutely. I think the key concern as looking at what inflation outcomes have been this year relative to what the input of inflation would've been from a nominal GDP perspective. So, it'll likely be lower from an inflation perspective for this year. And of course, then the important thing for debt-to-GDP, the ratio itself is nominal GDP. So, we do expect nominal GDP to maybe surprise to the downside, which will be worse for our debt-to-GDP trajectory. But I think it's worth mentioning that even though we say it's a concern, the premise on which there's an idea or an intention to lower the inflation target is sound. I think the SARB governor a couple of weeks ago mentioned that if you have inflation at 6% prices double every 12 years, and you have to add 3% then they double every 24 years. So, for an LSM consumer who's more vulnerable to the effects of inflation that is a very sound objective, but then also, as my colleagues have mentioned, is around our debt financing. And because you've had these declines in our government bond deals, then that means our borrowing costs will likely be lower, and then that lowers interest expenditure on the side of government, and that will, of course, then free up capital to spend on those growth enhancing areas of the economy, et cetera.

11:36 – Revenue vs spending

Jeremy: Tertia, let’s get into the numbers. Revenue versus spending. What are you expecting on both fronts from Minister Godongwana.

Tertia: One can certainly say this year has been here full of surprises, starting in April with the Trump tariffs, concern about major downward revisions in global growth, there's been a rebound now ,and then of course the uncertainty, that hasn't gone away – it has manifested itself in the search in the gold prize that's also spilled over to the platinum price. And with South Africa, a small open economy, very exposed to global commodity prices and global trade, this has really been a big plus for us, and one of the reasons why the rand has also rallied. So, the doubling in the gold price to nearly $4,000 per ounce is really going to boost mining revenues from mining companies in addition to platinum. So, they will be another revenue increase of about R35 billion or so. And then this week the commissioner of SARS, also said that they've managed to collect, I think it's nearly R18 billion more in taxes. So, there's going to be a fairly substantial overrun in revenue receipts. And then on the expenditure side, a lot of work is being done by National Treasury. A couple of months ago they announced a program, so that is the Targeted and Responsible spending package - TARS. Basically, a program where they're reviewing various apartments’ spending programs. I don't know what we are going to receive because over the past 10 years they've conducted more than 200 reviews, but those reviews were never integrated into the budget. So, with this TARS review, it will be integrated, but it will take some time. So, we'll monitor the progress there. They're also looking at number of ghost workers. We've seen, I think there's nearly 5000 every year. So, they're doing data counts where people actually have to show up to see that they, that they're working and that they're alive. So, all of this will feed in. Even though the numbers may not be big for starters, I think it'll unfold. So how this culminates is the budget deficit can come in better despite the fact that the nominal GDP growth rate will be lower probably from about 4.5% percent to about 4%.

13:36 – Expectations for the fiscal anchor

Jeremy: Annabel Bishop, back to you. What are you expecting then on the fiscal anchor?

Annabel: So, I think to dovetail what Tertia is saying, and of course it's very important to note that National Treasury is looking to curtail expenditure. And I think from a fiscal anchor perspective, what that really means is that they are trying to put some sort of controls in place to really focus on expenditure, to really focus on the ratios, debt-to-GDP, and to obviously try and bring fiscal consolidation in. What I'm expecting on the fiscal anchor front is actually to look at some type of anchor on current expenditure, a flexible anchor, flexible target, but nevertheless to actually control, as we said earlier, current expenditure really is looking at expenditure, less fixed investment, and from that perspective to reduce that expenditure and to allow more room for funds to go to fixed investment in South Africa is seen as one of the growth promoting mechanisms. Also, it reduces inflation, it increases capacity in the economy but particularly allowing this to be a flexible target - when we go through difficult periods, where we perhaps have less revenue than collected, and we still have spending imperatives, because there are certain expenditure areas you can't move away from in the current expenditure bracket, and that's of course social welfare and that's your child support grant, education, many of those other areas, as Tertia mentioned, looking to streamline them. To remove ghost workers and other forms of expenditure that are not appropriate, but nevertheless to try and actually bring South Africa, even though we've got an expenditure ceiling, to try and actually now focus even harder on expenditure because that really has been the area that's run away over the past few decades and seen our debt to GDP ratio increase.

15:21 – Is SA on a path to fiscal consolidation?

Jeremy: Osa I want to bring in the investor lens now if we can. We've discussed the elements of the mini budget. What signals in this framework then in the speech would reassure investors that we are on a path to something of a fiscal consolidation?

Osa: I think throughout the discussion we've gone into quite a lot of detail around what the investor community will be looking for as far as growth is concerned, as far as revenue expectations are concerned, and as far as bending patterns are concerned from government side. I do want to zoom in on something that I don't think we've covered, which was very much part of the conversation at the time of the budgets in February, March and April. It was comments by the SARS commissioner related to uncollected tax, which amounted to something around R800 billion. That was what he said at the time, and in that scenario, he went and he requested additional funding from National Treasury. I have stand corrected, but I think the allocation that they got was around R4 billion to capacitate soils in terms of their efforts to collect these outstanding revenues. So, what will be critical, because we've touched on how the fiscals will benefit from the commodity cycle, but then we also have to discuss how successful has SARS been with this additional budget allocation in terms of collecting that outstanding R800 billion. You'll remember that the impulse itself on from a budget perspective was, over the medium term, R75 billion, and that caused the instability we saw at the beginning of the year. But then when you look at and you say R800 billion can be collected, that's what they want to collect, t hat's a target that they've set. If they are incrementally more successful in collecting those bits and pieces in addition to commodity cycle, then it does contribute to a more positive fiscal story.

17:12 – What’s driving the government bond yields rally?

Jeremy: Tertia earlier you referenced government bond yields that have rallied recently, and I guess one could argue that it is a sign that investors are sensing something of an improvement in the fiscal outlook. So how do you see it and what is driving the rally and maybe what are the implications there for debt servicing cost?

Tertia: Jeremy, I think that's such an important question. So, when we look at the drivers of the bond yields this year, there's definitely been a re-rating. And I think what drove it was a change in the macroeconomic policy framework. So, the first was the announcement of Reserve Bank, now preferring the lower end of the inflation target of 3% and then the second one was fiscal anchor. So that sort of gives more focus on consolidation and on accountability. So that was the catalyst. But I think the second issue here is that the inflation risk premium has declined, but the fiscal risk premium has remained relatively elevated. And that is where the growth story, the revenue receipts, will be playing out.

18:16 – Progress on structural reforms

Jeremy: So Osa, let's turn to the economy now, and I'm looking forward to this answer. How do you assess progress on structural reform? Are we starting to see tangible shifts that maybe could shift productivity and even broader confidence?

Osa: That's probably my favourite topic. The broad backdrop on structural reform is becoming very encouraging, and I'd like to just break this up into three parts. An excellent place to start on structural reform is looking at the evolution of the South African Reserve Bank's Monetary Policy Committee statements over time. The last time they mentioned structural constraint as a binding constraint on economic activity was January last year, and consistently prior to that particular meeting, they always cited the structural capacity in South Africa being an issue from a growth perspective. That's all but disappeared from their MPC statements now. That is supportive of the notion that structural reform is improving or there's structural improvement in the South African economy. The second place you can look is the business leadership South Africa Reform Tracker, which is also showing encouraging signs. And then the third place, and we've got our own internally developed SOE performance index, where we track the performance of our ports, of our rail and of energy. From an energy availability factor perspective, there's been a lot of conversation on the fact that the energy availability factor recently reached around 70% - very encouraging, but also more importantly is looking at trend EAF to this time of the year relative to the past two or three years. Right now, energy availability factor on average is sitting close to 60% from January to October. Last year it was sitting at around 57% and the worst of the structural constraints on the economy was 2023. At that point in time, energy availability factor was sitting at an average of around 53.7%. So, it just tells you that from an energy security perspective, there's been improvement. From a port perspective, we've seen improvement, in fact recently we had the July data coming out as our best July in terms of TEUs moved at our ports in the last seven years. August, data was equally encouraging, so it tells us that ports are improving, rail, there's still some room for improvement, but the point from a rail perspective was that you are well off the trough of performance that was experienced in 2023. We have seen a rally, we've seen a stagnation of late, but the broader backdrop, as I say, is very encouraging.

20:44 – To what extent is the fiscal story intertwined with commodity cycles?

Jeremy: So, let's thread the needle a little further then. How is it playing out in equity markets? Much of this year's performance, as we know, has been driven by gold and platinum. So, to what extent is the fiscal story then intertwined with commodity cycle?

Osa: I suppose at this point in time, as you say that the local market has primarily been driven by gold and precious metals, that is a fact. SA Inc valuations remain depressed, and that ties in back with the credibility of South Africa's recovery story. The SOE performance is improving but you need to see that structurally the case and you have to have convinced investors that is the case. So that is the first thing, but then that should translate into high economic growth. So, then it does tie in with does economic growth improve in this environment? Because growth is ultimately what investors are buying into, and we've had a period of very sluggish growth permanently over the past 15 years or so, averaging around 1%, and that is just simply not good enough. Our new forecast is growth at around 1.5% for this year, a material improvement from last year, which was around more 0.8% or so. And then you need to see growth to trend towards an above 2% and it's above 2% where you meaningfully address unemployment outcomes in South Africa. And of course, then that plays itself out into the consumption dynamics and spending dynamics in South Africa, which are also supportive of growth.

22:13 – Expectations from rating agencies

Jeremy: So, Annabel talking about convincing investors, we have exited the grey list from the Financial Action Task Force, but sovereign ratings do remain a delicate issue. If I'm not mistaken, S&P’s review is due out mid-November, Moody's and early December. What's your broad expectation there?

Annabel: Yeah, so the credit rating agencies have said before that they haven't included South Africa's listing on the grey list by FATF as an area which they see significant concern. And then with South Africa coming off the grey list now recently, that's not likely to give a boost either from a credit rating perspective. Essentially it boils down to the fact that credit rating agency really only look at one thing, and that's the ability of a country or an entity to repay its debt obligations. Now, there's many other factors they look at to determine whether they think it's going to repay its debt obligations or not. And those include economic growth. They obviously include revenue, expenditure, the fiscal ratios, the entire gamut of the conversation that we've been talking about today. And of course, the credit rating agencies always do review South Africa after its mini budget and its budget itself. With all the positive implications we've been hearing today, certainly you know, from South Africa's narrow rally in commodity markets, but nevertheless and precious metals, will help to boost our government revenue take. With gold now being our biggest export coming through in the top 10 commodities, all of these factors do point to an improvement in our fiscal outlook. Now, of course, you can't bank on a permanent rally in commodity prices or precious metals and indeed, a few years ago we actually saw a reverse in commodity price which negatively affected our government revenue and expenditure. And as such, of course, we now found ourselves in a situation where we are in a period potentially of largesse coming through, which could help the fiscal ratio. So, I think much is going to depend on the projections, but the credit rating agencies are likely to remain cautious on a longer-term perspective with South Africa fulfilling many of its structural reforms and looking to do significantly more going forwards, that is a firmer basis to look for credit rating upgrades. First of all, you get positive outlooks and we've had some, and then of course, that signals a potential for accredit rating upgrades. So, we don't think it'll come now this year, but we think longer-term there is potential for South Africa, if we continue on a positive trajectory, we're looking for economic growth to reach 3% by the end of the next five years, but of course, get there much quicker if our structural reforms are quicker than currently expected.

24:30 – Could fiscal prudence, or lack of it, influence the MPC’s tone on interest rates?

Jeremy: Now Tertia, we can't obviously have this conversation without a look at interest rates. The Reserve Bank's next decision is out late November, shortly after the mini budget. So, could fiscal prudence or lack of it influence in any way, the monetary policy committee's tone on rates?

Tertia: It definitely feeds into the interest rate decision via the real repo rate. So, the real repo rate is the difference between the nominal policy rate and the inflation outlook in 12 months or so. And what goes into that real rate is the fiscal risk premium combined with the G three's real interest rates and the Reserve Bank estimates that that real rate is run about 2.8%. So, any sustained improvement in that debt-to-GDP ratio, the commitment to it can then start to lower the fiscal risk premium. So, while it's not going to be an overnight development, as like what we discussed during this podcast, I do think ongoing commitment from the coalition government, from National Treasury steps to improve the expenditure dynamics, the revenue overrun and then very importantly, if the municipal finance can announce a lower inflation target to back up the Reserve Bank’s lower inflation target focus, I think it can be a positive. I just want to add that the inflation outlook is fairly contained as well, even though inflation is slowly ticking up - our real rates remain very wide.

25:57 – What would success look like for the 2025 MTBPS?

Jeremy: So, Annabel, let's put a punctuation point on this fascinating conversation. Simple question - what will success look like come the end of this mini budget.

Annabel: So, I think, the first thing that financial market analysts look at and what credit rating agencies look at is really what is the debt-to-GDP projections and what are the fiscal deficit. That really tells you how much we are in for going forward in terms of additional borrowing. And what that really means is what is the strain going to be on the economy. Government borrowing crowds out private sector fixed investment. We've had high bond yields over the past several years and of course it's easier for investment to take those yields and to go parts into riskier areas which fixed investment would be in comparison. So that's one key area. I think, looking at a coherent economic story, you have to really cover all bases. And many of them have been discussed today, and I think it's very cheering that we're on such a new and solid path for the South African economy. But again, after we've looked at those ratios, it's also quite important to see where is the expenditure directed. In the last budget, we heard that they're going to retire many civil servants allowing new youngsters to come and reduce the wage bill in South Africa. That's seen as a big fiscal drag. And of course, as well too, as we said earlier, to shift expenditure towards fixed investment and to cut down on current expenditure. I think we obviously do see an embedding of the social relief grant, and that's important as well. But ultimately, what South Africa needs is much stronger sustainable economic growth, not flesh in the pan, economic growth driven by a very good field crop harvest, which we're having this year. And of course, a delay in the tariffs, which wasn't expected, but actually longer-term structural change and structural investment that investors overseas can bank on - a rerating of South Africa, if you will. And of course, while the removal of FATF helps in that area, there are many other factors which come together as well. So, telling a more credible story for South Africa from an investment destination includes a more fiscally credible story as well and I think, while we are going to leave it there for today, the bottom line really is every budget counts. And if we start to see fiscal slippage again, you once again start to see a loss in investor interest or at least some uncertainty. We need to start to bed that down and really provide a more investible case going forward.

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