Preview of the 2024 Medium-Term budget policy statement: fiscal consolidation and growth expectations
As South Africa awaits the 2024 Medium-Term Budget Policy Statement (MTBPS), there is cautious optimism about the country's economic trajectory. The recent shifts in fiscal strategy, driven by ongoing reforms and an improved political landscape, signal that we are edging closer to a new phase of stability and growth.
This year, the MTBPS comes amidst decreasing inflation, still high but gradually lower interest rates and a strengthened Rand. According to Johann Els, Group Chief Economist at Old Mutual, the MTBPS is expected to showcase continued fiscal consolidation efforts and policy reforms aimed at narrowing the budget deficit and stabilising the debt ratio over the coming years.
Els emphasises that South Africa’s fiscal position is steadily improving. “The budget deficit is expected to narrow further from last year’s figures, with the outcome this year tracking better than February’s estimates,” he notes. Els predicts the primary budget balance will reach a slightly bigger surplus this year – compared to previous estimates, a significant milestone that Treasury expects will continue to strengthen in the medium term. This progress is attributed to improved revenue performance and disciplined expenditure control, which are likely to reduce the fiscal deficit to around 4.3% of GDP, down from earlier projections of 4.5%.
One of the primary themes in this MTBPS will be South Africa’s path to a more sustainable debt ratio. While Treasury’s projections currently place the debt-to-GDP ratio peaking at 75.3% in 2025, this is far below previous forecasts by major credit agencies like Moody’s and Fitch, which anticipated the debt ratio would exceed 90% by this period. “These improvements indicate a stabilising debt trajectory, which we hope will prompt ratings agencies to adjust their outlook on South Africa from ‘stable’ to ‘positive’ within the next six to twelve months,” says Els. He further suggests that while an actual credit upgrade may take another year or two, South Africa’s improved fiscal position could lead the way back to an investment-grade rating in the medium term.
In addition to debt management, Treasury’s goal of building primary budget surpluses is firmly on track, according to Els. This strategy is crucial in creating a foundation for lower debt issuance in the near future, a shift that will alleviate some of the pressures on national debt servicing costs. “Every one percentage point reduction in interest rates lowers interest costs by approximately R7–R8 billion and reduces debt by R12–R14 billion,” he explains, highlighting the compounded benefits of reducing the deficit and controlling debt issuance.
There is also anticipation around the MTBPS's potential announcements on social spending and state-owned enterprise (SOE) support. Els notes that while there may be discussions about extending the Covid-19 relief grant or transforming it into a more permanent social support structure, significant SOE interventions such as for Transnet might be deferred to the main budget in February 2025. Any potential SOE support will be conditional, reinforcing Treasury’s “tough love” approach to fiscal support, aimed at fostering operational reforms within these entities.
Looking at the broader macroeconomic outlook, improved growth expectations have boosted Treasury’s revenue projections. Although revenue remains slightly behind target for the first five months of the fiscal year, Els expects collections to pick up in the remaining months as growth gains momentum. Proceeds from 2-pot pension withdrawals – not included in the February budget’s tax estimates – will also help. This uptick is anticipated to further bolster the budget deficit targets and continue enhancing South Africa’s fiscal position.
As for inflation, while the MTBPS may make a nod towards an inflation target adjustment, Els believes it’s unlikely that a new target will be introduced in the near term. Lower inflation and interest rates are anticipated to further stabilise the Rand, which has shown signs of strengthening. “A stronger Rand, coupled with ongoing load-shedding improvements and better inflation control, will boost confidence among businesses and consumers, supporting economic growth over the medium term,” he concludes.
With these updates, the 2024 MTBPS promises a cautiously optimistic outlook, rooted in fiscal responsibility, improved growth and continued reforms to strengthen both investor confidence and South Africa’s economic stability.
