Citadel’s Chief Economist says the medium-term budget was fair and transparent – and made it quite clear that more hard work was needed to fix economic growth, growing debt and the country’s continued greylisting

‍Finance Minister Enoch Godongwana’s Medium-Term Budget Policy Statement (MTBPS) delivered today poured cold water on all the good news the market was expecting about an improving economy following the formation of a Government of National Unity (GNU), improved energy security and lowering inflation, according to Citadel Chief Economist, Maarten Ackerman.

“From the minister’s opening sentence (on domestic outlook), the MTBPS was a reality check on the positive expectations prior to this announcement. There were no short-term wins in any of the numbers. The rand weakened and bonds sold off immediately because the budget is based on the reality on the ground and not just positive thinking. We can’t fault the budget, however. The process has been thorough and world class,” said Ackerman.

Debt and high expenses still block South Africa’s economic growth

Godongwana announced a forecast for real Gross Domestic Product (GDP) growth of only 1.1% in 2024, which was lower than the estimate of 1.3% he announced in February. Over the medium term, growth was forecast to average 1.8%, with the best-case scenario being 2.5% and worst-case scenario potentially reaching a low of 0.5% growth. To improve the situation and achieve higher inclusive growth, Godongwana said the country needed to focus on four growth pillars: macroeconomic stability, structural reforms, growth-enhancing infrastructure, and improved state capability.

Ackerman believes that economic growth reform was “contingent on structural reforms”. “The big elephant in the room is still the public sector wage bill, and today we were told we rank third highest in the world at about 14% of GDP, whereas the global average is only 10%. They also made the point that we are much higher than the rest of the world on general government employment levels, so it is good news to hear that the government is offering about 30,000 public servants early retirement packages. In the short-term unfortunately, it feeds into the government’s high debt (at a cost of R11 billion), but we appreciate that it is a difficult task and at least they are taking big steps to lower the wage bill.”

On the topic of government debt, the Minister announced that South Africa’s debt-to-GDP ratio sat at an “unsustainable” 75.5%. “The only reason we are still sub-80% is because of the monetisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) in February, which took away some of Treasury’s funding pressures. On the positive side, we did achieve a positive primary balance, but that excludes debt payment costs…. which we can’t just ignore as it is now more than 20% of budget expenditure said Ackerman.

Ackerman said it was very concerning that South Africa fared the worst out of 94 emerging market economies in terms of the country’s debt trajectory. Both the percentage of debt-to-GDP and the country’s debt servicing costs were far higher than all the other emerging markets.

Good and bad news on South Africa’s greylisting

Godongwana said it was good news that the Financial Action Task Force (FATF), the international body that greylisted South Africa, found that the country either largely or fully addressed 16 of the 22 action items on its checklist. Ackerman however cautioned that the remaining items, which included the need for more sustained prosecutions of high-profile financial crimes, were the hardest items on the list. “It is highly unlikely that South Africa will tick all the boxes it needs to before the FATF’s next assessment in February 2025. It may take another year to get off the greylist,” said Ackerman.

Expanded infrastructure spending brings some good news

“Infrastructure spending is always a great injection into the economy,” said Ackerman. “Half of what we are spending on is needed, like improving our ports and rail system. But there is more we need to do in terms of structural reforms to get the economy back to capacity growth. This is why it was good news today to see that Project Vulindlela added three new items to its second phase, including smart cities, digital public infrastructure and strengthening local government’s ability to deliver basic services.”

He added local government debt relief, which would enable municipalities to pay their debts to ESKOM and the Water Board, was a positive step forward, “but the numbers are still enormous.”

Conclusion

“It was very prudent of Treasury to not be too optimistic, because they have to take global headwinds into account, as well as many remaining local structural issues that will take some years to address,” said Ackerman. Looking at Godongwana’s current budget, he anticipated that above capacity economic growth is only likely in years to come.