National budget review 22 February 2023

Sanisha Packirisamy, Economist at Momentum Investments

Initial impressions

• There was a broadly positive response from fixed income and currency markets, with government pledging significant financial support to energy utility Eskom. Given no tax implications (no fuel levy increase and only inflation-related increases in sin taxes), full compensation for bracket creep (R15.7 billion) and inflation-related increases in grants, the outcome for South African (SA) equities should be largely favourable. Although Treasury stuck to its guns on fiscal consolidation and adhered to a prudent approach to spending, market participants remain wary of the tough fiscal decisions that must be taken to further support other state entities, to address the cost-of-living crisis that civil servants face and to increase government’s financial reach to the most vulnerable.
• Treasury’s medium-term economic forecasts look reasonable. Its expected average economic growth rate of 1.4% between 2023 and 2025 is broadly in line with our own expectation and that of the Reuters median consensus estimate of 1.6% and 1.4%, respectively. Treasury’s projection on inflation of 5% over the same period further broadly matches our expectation of 5.1% (Reuters consensus: 5%).
• Treasury’s estimates on the anticipated revenue overrun for the current fiscal year have been upwardly revised from R83.5 billion in October to R93.7 billion (relative to February 2022) due to an extended period of elevated commodity prices supporting corporate income tax collections from the mining sector. The bulk (80%) of the expected tax overshoot comes from corporate income taxes, while personal income taxes and dividends taxes account for a further 15% and 9% of the overrun, respectively.
• Fifty seven percent of the higher-than-expected revenue will be used to reduce the fiscal deficit.
• Treasury estimates a R93.2 billion (-R1.4 billion) and a R100.1 billion (R0.4 billion) tax revenue overrun in FY23/24 and FY24/25, respectively, relative to estimates in February 2022 (October 2022) on resilient personal incomes and corporate profitability.
• Government has not funded additional diesel costs and must be found within Eskom’s existing expenditure budget.
• Government predicts that the revenue buoyancy (tax collections per unit of economic growth) is expected to drop to an average 1.07 in the next three fiscal years from 1.42 in the current fiscal year. Lower commodity prices (Treasury’s assumptions on key commodity prices do not deviate too widely from the Bloomberg median consensus forecast for the next three years) and damaging loadshedding are expected to drive down the tax buoyancy ratio in the medium-term expenditure framework (MTEF).
• Expenditure estimates outlined in the budget comfortingly show that the spending balance has been tilted in favour of growth-enhancing expenditures. Real growth in capital outlays is expected to average 9.7% in the next three fiscal years, while real growth in the compensation of employees is expected to decline on average by 1.5% during the same period. This will bring the share of employee compensation to non-interest spending down from 31.8% in FY22/23 to 30.7% by FY25/26. Nevertheless, cost-of-living pressures and a renewed threat of strike activity by nine public sector unions raise risks for a higher-than-budgeted wage increase. Unions are demanding a 12.5% increase in comparison to government’s offer of 4.7% in FY23/24. News24 reports that six of the nine unions are classified as essential staff and cannot legally strike.
• At 4.2% of GDP, SA’s fiscal deficit ratio for FY22/23 was more favourable than the Reuters consensus of 4.5% and compares favourably with a 5.4% deficit projected for emerging markets (EM) in 2023 and 5.5% in 2024, as estimated by the International Monetary Fund (but less favourably against 3.7% and 3.8% projected for developed markets (DM) for the same period). Although Treasury projects a significantly narrower government deficit ratio of 3.2% in the outer year of the MTEF, the Reuters consensus takes a more bearish view on the success of fiscal consolidation efforts and sees the deficit ratio narrowing to only 3.9% in the same period. Treasury noted we have reached a primary budget surplus for the first time since FY08/09, which is expected to be maintained over the medium term. Treasury estimates the gross debt-to-gross domestic product (GDP) ratio will peak at 73.6% in FY25/26 (previously 71.4% in the current fiscal year) before declining. This compares with a debt ratio of 67.5% in EMs for 2023 (70.2% by 2024 and 72.6% by 2025) and 111.3% in DMs for 2023 (112.4% by 2024 and 112.7% by 2025).
• Although the negative growth implications of more intense loadshedding pose a risk to the near-term outlook on sovereign ratings, we expect the rating agencies to keep their ratings intact. Moreover, rating agencies are not likely to alter SA’s rating solely based on the outcome of the greylisting decision of the Financial Action Task Force.

National budget review 2023: click here