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2021 Medium-Term Budget Policy Statement: initial reaction

11 November 2021 Momentum Investments

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South African Finance Minister Enoch Godongwana tabled the 25th Medium-Term Budget Policy Statement today, where he emphasised the budget’s focus on navigating the country’s path toward an economic and social recovery.

Although the headline fiscal deficit ratio relative to gross domestic product or GDP, came in slightly wider than the market consensus as well as relative to estimates by the South African Reserve Bank, there were no major negative surprises with a number of issues left to provide further detail on in the February 2022 National Budget.

Treasury’s macroeconomic forecasts look broadly in line with ours, the market consensus, and those of the Reserve Bank. Treasury anticipates real GDP growth of 1.7% in the medium-term, and inflation of 4.3%. Treasury appears slightly more optimistic on longer term potential growth in South Africa, relative to our own projections. Treasury sees longer term growth beyond the medium term at 2%, likely factoring in some progress on structural reforms.

Treasury highlighted progress on reforms in the areas of energy logistics, tourism, water, telecommunications, infrastructure and strides made on corruption. In our opinion, we think that potential growth could disappoint by up to 0.5% relative to Treasury’s figures, given the slow pace of structural reform relative to market expectations. No left-leaning announcements were made on the need for a state bank, state pharmaceutical company, or prescribed assets, and no further detail was outlined on land reform or the nationalisation of the Reserve Bank.

The revenue figures highlighted an overrun in gross tax collections of R120.3 billion, of which R75.5 billion could be attributed to corporate income taxes, likely driven by the previous surge in commodity prices, and R26.2 billion could be attributed to personal income taxes, which is likely the result of a faster-than-anticipated recovery in wage growth. Treasury rightly pointed out the temporary nature of the commodity price windfall, and pledged to avoid committing to new long-term spending in response to temporary revenue windfalls.

Treasury partly utilised the revenue overrun to narrow the fiscal deficit to provide short-term support to the vulnerable and to cater for the R20.5 billion overrun on the public sector wage bill. the public sector wage bill continues to pose an upside risk to the expenditure line. If Government loses the court battle against unions on the 2018 wage deal, Treasury suggested would have to consider additional revenue measures, increased borrowing or reduce the size of the workforce. Treasury did not fund the R20.5 billion overrun for fiscal year 2021/22 via re-prioritisations, and have disappointingly allocated a further R20.5 billion for fiscal year 2022/23.

Government remains committed to social spending, highlighting that, including the 9.5 million recipients of the social relief of distress grant, 46% of our population are receiving some form of social assistance. Over the medium-term framework, the social spend wallet accounts for nearly 60% of total expenditure. While no detail was disclosed on a further extension of social protection to households, the budget deferred detail around this pressing issue to the February 2022 Budget, merely stating that Treasury must remain cognisant of the fiscal balance and any other pre-existing priorities that remain unfunded by Government.

Longer term risks to the fiscal outlook remain, in our view. These include further bailouts to ailing state owned enterprises and additional financing to underperforming municipalities. Although the Minister acknowledged the need to consolidate smaller, state-owned enterprises and involve the private sector where strategic relevance is lower for Government, no further headway has been made outside of the example set by South African Airways. Moreover, longer term spending requirements such as the National Health Insurance, continue to pose a risk to expenditure in the longer term.

Given ongoing sticky medium-term fiscal and growth risks, we believe the bias to South Africa’s sovereign rating outlook is to the downside in the medium term, despite an improved near-term outlook, which is likely to stave off ground downgrades at the November round of rating reviews.”

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