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Budget 2024 Snapshot

22 February 2024 Reza Ismail, Head of Bonds at Prescient Investment Management
Reza Ismail

Reza Ismail

Summary

• South Africa's 2023 GDP growth forecast has been lowered to 0.6 per cent due to weaker?than?expected 2023Q3 outcomes.

• SA's economy has been subject to several headwinds, including persistent power cuts, operational and maintenance failures in freight rail and at ports, and high living costs.

• The medium?term outlook is forecast to average growth of 1.6 per cent.

• In 2023/24, for the first time since 2000/01, debt?service costs absorb more than 20 cents of every rand collected in revenue.

• In 2023/24, debt?service costs were revised upwards by R15.7 billion compared with the 2023 Budget estimate, mainly due to the higher budget deficit.

• As a share of GDP, debt?service costs are projected to average 5.2 per cent over the medium term; as a share of revenue, they are expected to increase from 20.8 per cent in 2023/24 to 21.1 per cent in 2026/27.

• In line with the 2023 MTBPS announcement, tax increases of R15 billion in 2024/25 are proposed to alleviate fiscal pressures. They include:
- No inflation adjustments to personal income tax tables and medical tax credits.
- Above?inflation increases in excise duties on alcohol and tobacco.
- As in the 2022 and 2023 Budgets, the general fuel levy and Road Accident Fund levy are not increased – costing an initial R4 billion.

• Government is implementing reforms to reduce waste and improve quality of public investment. The key elements of the reforms are:
- Consolidate the financing, preparation and planning arrangements for large projects in a single entity to crowd in private?sector finance and expertise.
- Increase the use of PPPs to deliver infrastructure projects. Reduce fragmentation and duplication across spheres of government.
- During 2024/25, an infrastructure finance and implementation support agency will be established to coordinate the planning and preparation of large projects, engaging directly with private financial institutions. The agency will incorporate the functions of project preparation, PPP technical support and data management.

• Government will undertake a R150 billion settlement of Gold and Foreign Exchange Contingency Reserve Account (GFECRA) over the next 3 years guided by several principles.

• Current accounting practice is that gains and losses are recorded but not settled, making the Reserve Bank's liability to the government unusually large.

• Proposed settlement agreement aims to establish a new framework to reduce government borrowing and align the Reserve Bank's practices with international norms.

• Principles for the partial settlement of the GFECRA are:
- First Bucket: retains funds to cover potential exchange rate fluctuations.
- Second Bucket (Reserve Bank Contingency Reserve): ensures central bank solvency and covers costs of interest rate impact neutralisation.
- Third Bucket (National Treasury): receives funds after fulfilling the first two obligations.

• In addition:
- The Reserve Bank’s policy solvency should not be undermined by any GFECRA distribution. In practical terms, this means the central bank should not suffer sustained negative equity.
- There should be no sales of foreign exchange reserves to realise GFECRA gains if such reserves are below estimated adequacy levels.
- There should be no distribution of unrealised GFECRA balances that could plausibly be unwound by future rand appreciation.
- Any GFECRA distributions should be governed by a framework that rules out ad hoc decisions; should be public to ensure transparency; and should be used to reduce government borrowing.

• The Electricity Regulation Amendment Bill is advancing in the National Assembly, aiming to create a competitive electricity market for better energy security.

• The National Transmission Company board was appointed in January 2024, marking a significant step in separating Eskom into generation, transmission, and distribution units.

• The Freight Logistics Roadmap, approved in December 2023, outlines measures to improve freight logistics performance and required structural reforms.

• The Economic Regulation of Transport Bill, expected to pass in Q1 2024, will promote a competitive logistics system and establish the Transport Economic Regulator.

• Government debt is expected to peak at 75.3 per cent of GDP in 2025/26 and decline thereafter.

• In line with government’s fiscal strategy, gross loan debt is expected to stabilise at 75.3 per cent of GDP in 2025/26 – lower than the 77.7 per cent projected in the 2023 MTBPS – and to decline thereafter.

• The medium?term gross borrowing requirement will be R196 billion lower than projected in the 2023 MTBPS, mainly due to a change in the arrangements governing the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) between the National Treasury and the Reserve Bank.

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