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MTBPS commentary

11 November 2021 Reza Hendrickse, PPS Investments Portfolio Manager

Finance minister Enoch Godongwana’s maiden Medium Term Budget Policy Statement (MTBPS) was broadly in line with expectations, judging by the muted reaction from the bond and currency markets. Not too dissimilar from his predecessor, ex-Finance Minister Tito Mboweni, the budget address was an attempt to find a balance between continued fiscal consolidation, while paving a way for improved economic growth.

South Africa has benefitted from the rebound in global growth, but in line with its emerging market peers, growth has not been as impressive as developed markets. National Treasury expects the domestic economy to grow 5.1% this year, and to average 1.7% pa over the next 3 years, dependent on our vaccine rollout and weighed down by unreliable electricity supply.

The Minister acknowledged that the key to addressing the structural challenges SA faces is through better economic growth, leading ultimately to fiscal sustainability. The key issues to be tackled to ignite growth include ensuring stable energy supply, which is particularly relevant as SA struggles with the worst year of load shedding so far. The plan is to also reduce reliance on Eskom through greater diversity of affordably primary energy sources, and to accelerate the transition to renewable energy sources.

Apart from working on ensuring reliable energy supply, other focus areas for Treasury to support domestic growth include improving SA’s logistics infrastructure, resolving the issues blocking the release of high demand spectrum and making data more affordable, boosting tourism through the e-Visa system, and improving the management of bulk water sources.

On the fiscal policy front, the consolidated budget deficit is now expected to be 7.8% of GDP in 2021/22, which is half of what was expected this time last year. This is the result of better than expected tax revenue collection in both corporate and personal taxes as well as mining royalties. Encouragingly, our debt-to-GDP forecasts have seen an improvement, with gross debt forecast to reach 69.9% in 2021/22, peaking at 77.8% in 2024/25. The debt trajectory is significantly better than in the February Budget, which forecasted each of these to be in order of 10 percentage points higher.

Looking ahead, the Minister highlighted areas of support, particularly in the wake of the pandemic. Provision has been made for R37.9bn of additional direct fiscal support, and R11bn earmarked for SASRIA to assist in settling claims from the July unrest. The Social Relief of Distress grant is set to expire in March 2022, but there was no mention of a more permanent basic income grant. At the moment, 46% of the SA population are social grant recipients.

No additional funding has been provided for state owned companies, which the Minister acknowledges have been poorly managed, and he also highlighted that going forward only SOE’s considered strategically important should be supported.

Speaking to retirement reform, there is a proposal underway to pursue a “two-pot” approach, allowing individuals partial access to one pot, while contributions to the other pot should be saved until retirement. Although positive for those that seek flexibility, this is probably not ideal for a nation that is generally not well-prepared in terms of retirement savings.

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