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- 2024’s Medium–Term Budget Policy Statement (MTBPS) saw a deterioration in the fiscal metrics against expectations, causing the rand to weaken to R17.76/USD from R17.63/USD, and bond yields rose.
- Much of the market reaction was countered by the strong GDP print in the US for Q3.24, at 2.8% qqsa, vs. Q2.24’s 3.0% qqsa, and drop in the core PCE deflator, to 2.2% y/y from 2.8% y/y, resulting in a reduction in risk aversion, and so US dollar weakness.
- This counteracted much of the rand’s (and SA’s financial market) reaction to the MTBPS, indicating that the US remains on track for a soft landing, with the rand chiefly determined by international events, particularly those in the US.
- The projected budget deficit widened to -5.0% this year (2024/25), versus -4.5% projected in the February Budget, and the -4.4% of the Bloomberg consensus (all as a % of GDP). There was no lowering of the inflation target.
- Similarly, the medium-term saw projections rise as well, from -3.7% to -4.3% for 2025/26, and to -3.6% from -3.3% for 2026/27, with -3.2% for 2027/28 (Bloomberg consensus -3.9%, -3.5% and -3.3% respectively).
- The deterioration in state finance projections extended to government’s debt to GDP ratio too, at 74.7% this year, up from 74.1%, 75.5% in 2025/26 from 75.3% and 75.3% from 74.7% in 2026/27 (2027/28 75%).
- The budget is slightly more credit negative on the deterioration in the projected fiscal ratios (debt nears R7trillion by 2027/28), but unlikely to result in a credit rating downgrade, but ongoing fiscal slippage, would risk negative outlooks for SA.
- Worryingly, gross debt remains above 60% of GDP (the maximum sustainable debt ratio for an emerging market economy) out to 2031/32, and the growing ratio reduces the sustainability of government finances.
- The downward revision to revenue and upwards revisions to expenditure projections have been responsible for the widening of the fiscal deficit and borrowing projections. Growth is seen at 1.1% y/y this year from 1.3% y/y in February.
- Expenditure increases on SOE debt repayment, public service and most functions of government. The revenue drops by -R15bn this year, expenditure rises by a hefty R26bn, widening the budget deficit by -R41bn, causing higher borrowing.
- For 2025/26 and 2026/27, the revenue revisions show a drop of about -R19.1bn, while expenditure rises by a substantial R65.5bn. Spending on economic development is projected at 7.8% over the three- year period.
- Rapid expenditure on economic developments is positive, supportive of economic growth, although the sub-category with the largest growth rate is on economic regulation and infrastructure, at 10.9% annual growth between 2024/25 to 2027/28.
- A massive jump in expenditure on regulations, and so more onerous regulatory environment is a disincentive for investment, while cutting red tape, and regulatory complexity would be a distinct positive in comparison.
- Most important for investors is the reward versus risk on their investment. A weak economic growth environment is not encouraging for foreign direct investment, with SA’s growth rate seen below 2.0% y/y until 2028 by National Treasury’s.
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