The 2023 Budget saw a weakening in the government’s debt to gross domestic product (GDP) projections and fiscal deficits, and with nearly three quarters of debt relief for Eskom on the R350 billion the state guarantees.
The government’s gross debt is consequently now projected to stabilise at 73.6% of GDP in 2025/26. Previously the projection was estimated to peak at 71.1% in 2022/23 in October’s Medium-Term Budget Policy Statement.
Key credit rating agencies (Fitch Ratings, Moody’s Investors Service and S&P Global) already rate South Africa’s debt, as including all Eskom and other state-owned enterprises (SOE) debt that the government holds guarantees over, and so the impact should be credit neutral.
Some improvements in fiscal projections did occur, with the budget deficit for 2022/23 lowered to -4.2% of GDP, dropping from the prior estimate of -4.9 % of GDP and still expected to reach -3.2% by 2024/25.
The downwards revision of Treasury’s economic growth forecast to 0.9% year on year (y/y) from 1.4% y/y is in line with the consensus (Bloomberg, Reuters) once a couple of outliers are removed, and 2024 sees a slight drop to 1.5% y/y from 1.7% y/y, while 2025’s forecast is unchanged at 1.8% y/y.
This has only a mild effect on the fiscal ratios while the overall improvement is that a primary surplus occurred a year earlier, likely in the current fiscal year, instead of in 2024/25 and consolidated debt narrows at a faster pace.
Fitch notes “our last forecasts in December indicated that the consolidated fiscal deficit would stand at 5.1% of GDP in the fiscal year ending March, 2023 (FY22/23) and staying close to that level in the following two years. This compares with the government’s forecast that the deficit would decline to 3.9% of GDP in FY24/25 from 4.9% in FY22/23, with the difference due to Fitch forecasting weaker government revenue and higher payroll spending”.
The state projections prove substantially better than this, with the budget deficit falling to 3.2% over the next three years, specifically from -4.2% of GDP this year to -4.0% of GDP next year; then -3.8% for 2024/25 and dropping to the -3.2% mentioned by 2025/26.
However, Fitch and the other key rating agencies are likely to be cautious in rushing to put though any improvement in their credit rating views as the economic outlook has weakened, particularly for this year, but also somewhat for next year.
Specifically, Fitch said “low growth potential… at 1.2%, remains a key credit weakness, a further weakening of trend growth or a shock that further undermines fiscal consolidation efforts could result in negative rating action”.
Though “there is some headroom at the sovereign’s rating of ‘BB-’ to absorb a temporary impact on economic metrics from load shedding, but a failure to address the problem over the medium term could add to downwards pressure on the rating”, it said.
Notable is that the Budget provides tax relief of R13bn while “the social wage is protected and fiscal balance is restored without resorting to unsustainable borrowing and damaging tax increases”.
The revenues’ overrun has been split between reducing debt, allowing a primary surplus as well as some new expenditure. The fuel levy is surprisingly not adjusted, but this will be to provide some relief to soaring living expenses in the past year, while consumer price inflation (or the measure of the cost of living) is still high.
The 2023 Budget tax proposals do not increase the overall tax burden and instead, the tax take falls by -R13bn. About R4bn is budgeted for incentives for individuals utilising solar power, aimed at relieving the energy crisis with the state increasing its efforts to combat climate change and address the energy crisis.
Overall the Budget is a good one given the set of circumstance it operates against. We would rate it seven and a half out of 10, with a higher rating were it not for the multiple crisis South Africa faces, ranging from the electricity crisis to the rail and port crisis and the unemployment crisis itself, as well as floods and water shortages continuing to plague the country, harming the economy, lives and livelihoods.
A better economic environment would allow a higher score, while the difficult economic environment instead that South Africa operates under, weakens the score as it weakens the economic outlook and thus state finances.
Annabel Bishop is the chief economist at Investec.