Red flag as budget deficit widens to 6% of GDP

The National Treasury’s most recent data gives the clearest indication yet that public finances are in bad shape before the budget later this month, with the budget deficit widening from 5.7% in November on a 12-month sum basis to 6% in December.

This is the largest deficit in more than two years, data published by the department last week shows, raising pressure on finance minister Enoch Godongwana to rein in public spending in an election year, a tough ask for any minister.

David Omojomolo, Africa economist at Capital Economics, said the data provides more evidence that public finances are in trouble.

He said the budget statement will cause Godongwana to walk a fine line between maintaining fiscal credibility and trying to appease ANC caucus pressure for extra spending.

“Tough decisions for the government lie in store as the budget later this month approaches,” said Omojomolo.

“This news does not appear to be halting government proposals for more spending. First, there is a plan to expand healthcare coverage to the many now uninsured. And second, President [Cyril] Ramaphosa gave strong hints of a basic income grant for citizens as a successor to the current pandemic stipend.

“Poor healthcare access and high unemployment rates mean these measures could help from a social perspective.

“But opposition has focused on the vague costings and deliverability. While the National Treasury is, of course, mindful of fiscal constraints, Godongwana is exploring novel sources of budget financing, including tapping [Bank] reserves.”

Bank governor Lesetja Kganyago told Bloomberg in November that the central bank was in talks with the Treasury to transfer reserves to fund the government’s growing budget deficit. The bank has also roped in “international expertise” to advise on its capital position.

Godongwana, in the medium-term budget policy statement tabled at the beginning of November, said the main budget deficit rose R54.7bn compared with the 2023 budget estimates.

The increase reflected lower revenue performance, higher wage bill costs and higher projected debt service costs.

The Treasury said at the time it was projecting a deficit of 4.9% of GDP compared with its previous estimate of 4%.

Bryn Hatty, Stonehage Fleming’s chief investment officer in SA, said the return of the twin deficits last year — in the country’s fiscal and current accounts — adds risk premiums to the rand and sovereign bonds.

“The government’s budget balance is predominantly affected by a reduction in mining tax revenues collected, as well as increased outlays on public sector wages, SOEs [state-owned enterprises] and social grants.

“While the National Treasury has been standing its ground on the fiscal consolidation front, markets are now pricing in a potential risk that electioneering rhetoric impedes these efforts,” said Hatty. “The annual budget speech at the end of February will be closely observed for a continuation of prudence, but also for any further allocations to SOEs such as Transnet.”

The Treasury data also shows the amount appropriated against the Eskom Debt Relief Act and the payments made to Eskom were R44bn for the year.

Godongwana’s fiscal prudence resolve will be tested in the budget, with pressure building for the government to bail out Transnet.

Provided guarantee

The SOE — whose sprawling logistics infrastructure makes it a systemic risk to the ailing economy — has asked the government for a R47bn equity injection or loan and for taxpayers to take over R61bn of its R130bn debt pile. The Treasury in November provided the cash-strapped entity with a R47bn guarantee that will make it easier for it to borrow and go to the market for capital.

Annabel Bishop, chief economist at Investec, expects the budget to show similar fiscal ratio projections to last year’s medium-term budget policy statement as “the marked fiscal slippage highlighted in November last year becomes entrenched, and so fiscal consolidation remains delayed”.

She wrote in a note: “Worryingly, gross debt was projected above 70% of GDP in 2031/32, and this reduces the sustainability of government finances, with a debt ratio of 60% of GDP instead seen as the maximum sustainable debt ratio for an emerging-market economy.”

Hatty said that as electricity and logistics are “extremely important” for the economy, their repair falls within the remit of Operation Vulindlela, a special joint initiative of the presidency and the National Treasury aimed at accelerating implementation of structural reforms and supporting economic recovery.

“Eskom is a bit further along than Transnet, and the next important milestone for the latter will be the finalisation of the Economic Regulation & Transport Bill, which is now scheduled for April.

“This bill would open the door for greater levels of private sector participation in the logistics network over time.”

Update: February 5 2024

The story has been updated to reflect the figures used are on a on a 12-month sum basis

khumalok@businesslive.co.za