PPS Investments: MTBPS 2023

Even prior to Enoch Godongwana’s MTBPS Address, it was widely known that South Africa’s fiscal health deteriorated this year.

This, however, did not render the “Mini-Budget” any more palatable. In short, it seems the mining company tax windfall of yesteryear was but a flash in the pan for our fiscal woes, and the more familiar anaemic-growth-and-much-needed-fiscal-austerity narrative, is in play.

In addition to global growth decelerating and financial conditions tightening, the SA economy is being held back by inadequate electricity and logistics infrastructure. The weaker growth environment prompted National Treasury to adjust its 2023 GDP growth forecast downwards, from 0.9% to 0.8%.

Alongside the tepid growth outlook, global commodity prices have also fallen this year. This has led to a significant drop in mining sector profits and therefore taxes accruing to the fiscus. This is the main driver behind the main budget deficit widening to 4.9% from the previously forecast of 4.0%.

A higher wage bill and higher debt-servicing costs also contributed to the R54.7bn increase in the main budget deficit compared to the 2023 Budget. In his speech, The Governor recognised the need to improve Government’s efficiency (i.e., the structure and size of the State) and to address rising debt servicing costs, where currently 20% of tax revenue goes to servicing debt. Worryingly, debt-to-GDP is now expected to stabilise at 77% by 2025/26, which once again is creeping in the wrong direction.

In response, the Minister has announced spending reductions and reprioritisations, while also attempting to take steps to support growth. As noble a pursuit as this is, in practice, these objectives are incredibly difficult to achieve individually, let alone simultaneously, so this may be some wishful thinking on the Minister’s part. Bear in mind there is an election coming up next year.

In terms of expenditure, spending has been revised lower by R21bn this year, R64bn next year, and R69bn the year thereafter. Additional funding has however been allocated to wages in certain sectors such as Health, Education, and Police Services, while the “Covid-19” grant has been extended by another year at a cost of R34bn. In a win for poorly run Municipalities (but not taxpayers), National Treasury intends to provide debt relief to municipalities who owe money to Eskom, to the tune of R56.8bn, to be written off over a 3-year period.

Addressing lifting our economic growth trajectory, the Minister rightfully, singled out Eskom as being a key constraint to growth. Headwinds faced are expected to ease going forward given renewable energy trends and the repair of certain units at Eskom, however the easing of self-generation restrictions and private investments in the area will no doubt mean Eskom may continue facing challenges. Although touched on in his speech, it is unclear how the difficulties faced by Transnet will be resolved, where rail underperformance is estimated to have cost the SA economy up to 5% of GDP in 2022.

Overall, the market seemed to take today's MTBPS in its stride, with bonds and the rand trading firmer after the release. This, however, is more a function of how low expectations were prior to today. Going forward, SA still has major challenges to overcome, many of which stem from the fact that our debt position is unsustainable. Given our structurally low growth economy, our debt trajectory will not improve, until we can sustainably engineer a budget surplus. In the absence of growth, this is extremely difficult to achieve politically.