OSAGYEFO MAZWAI: MTBPS may provide a second vital turning point for SA in 2024

Finance minister Enoch Godongwana and treasury director-general Duncan Pieterse ought to be excited about the upcoming medium-term budget policy statement (MTBPS), which may bring a new wave of optimism in the wake of the formation of the government of national unity (GNU).

Some of the most important inputs in charting our fiscal trajectory have changed over the last five months, which bodes well for our economic path. When the minister delivers the MTBPS there are a few things to be on the lookout for. These include positive revisions to our growth outlook and revenue projections, and more fiscal room to manoeuvre due to potentially lower borrowing costs (dependent on Treasury funding plans), among others. That said, there are various risks we should remain cognisant of too, but the odds appear to be biased towards a strong MTBPS. 

At the time of the presentation of the budget policy statement in February there was a fair bit of doom and gloom. The energy and logistics crisis, lower commodity pricing, depressed household consumption expenditure and elevated borrowing costs were among the reasons for pessimism regarding the trajectory of our fiscal stability. The government was forced to access the Gold & Foreign Exchange Contingency Reserve Account (GFECRA) to navigate the challenging outlook.

The government was relatively successful in ensuring that the GFECRA withdrawal was used primarily to pay down debt and manage debt issuance to fund government activities. The government and the SA Reserve Bank were also successful in the creation of enough of a buffer to ensure that any rand strength would not have a negative effect on the state’s liquidity requirements.   

The formation of the GNU has resulted in a noticeable change in sentiment towards SA. One of the results of this change has been a marked recovery in the rand against a basket of developed market currencies, including the dollar. Most important has been falling government bond yields, which on aggregate have dropped more than US 10-year government bond yields have fallen, evidence of reducing SA idiosyncratic risk. This implies that government borrowing costs could be revised down (depending on the Treasury’s funding plans).

As such we can expect downward revisions to SA’s debt-to-GDP trajectory and interest expenditure as a percentage of government spending. The budget deficit could similarly improve, premised on the previous point. The budget deficit was revised down by 0.9 of a percentage point in February, expected to peak at 4.9% from 4%. This puts into perspective the erosive effects of a high interest bill on overall government spending.   

On the other side of the coin are the expected revisions to SA’s revenue projections. While conceding that lower commodity prices may have a negative effect on the outlook for revenue collection, trend commodity prices have not changed materially since February, but the major change from an SA perspective are the structural constraints that have become enablers. Therefore, it is not outside the realm of possibility that the Treasury, like the private sector, will revise growth projections upwards.

While the Treasury had forecast growth to be on average about 1.6% between 2024 and 2026, there is plenty of scope for this to be higher. This may result in a reversal in what was seen as a deterioration in tax revenue collection at the time, to some opportunity for upside surprises. Eskom’s path to recovery is underpinned by its debt relief programme, with various conditions attached, which aims to put the entity on a firmer and more sustainable long-term path.  

The elephant in the room remains growth expectations out of China. China is important for global economic growth and commodity prices. Recently, Chinese authorities have announced a range of stimulus measures to boost the economy. At present, the US economy continues to be resilient, remaining supportive of global growth outcomes, which is generally good for countries such as ours.  

Another opportunity is household final consumption expenditure, which has been low for the better part of the last 15 years. The stronger rand, coupled with lower petrol prices and declining interest rates, should further enable consumer spending. The same is true for the recent two-pot pension system withdrawals, which should also catalyse household consumption expenditure. Another area of concern was fixed investment, but increased state spending on infrastructure and lower borrowing costs should provide further impetus. The increase in business confidence should equally result in a better environment for both local and foreign direct investment.  

If these projections are correct there should be a material improvement in the outlook for SA, come the MTBPS. The expected outcomes of the MTBPS should again be good for our borrowing costs as the market better grasps the improving idiosyncratic risks in SA. The odds are in SA’s favour, and we’re expecting tailwinds rather than headwinds.  

The current runway to the MTBPS is similar to the one seen in the budget speech of 2022, when elevated commodity prices saw SA collecting higher tax revenues than had been expected, and a budget that surprised meaningfully to the upside. The difference this time around is that SA is less at the mercy of global macroeconomic dynamics to tell a good story, but more at the mercy of how the government carries forward the momentum of the GNU, implements growth enhancing policies, creates a more conducive business and consumer environment, and unearths the latent potential of the SA economy.  

While we expect a good MTBPS, we must remain cognisant of certain items and policy positions that may affect or derail the various projections, which include but are not limited to the public sector wage bill, funding for the National Health Insurance (some provisions of the act are still under review), and funding for state-owned enterprises.  

• Mazwai is investment strategist at Investec Wealth & Investment International.