REEZWANA SUMAD: Budget to be delivered amid slow, steady fiscal improvement

Finance minister Enoch Godongwana will present the national budget later this month against the background of a marginally better fiscal trajectory boosted by a small revenue overshoot. We expect this to result in a narrower budget deficit and a larger primary budget (excluding debt-service costs) surplus.   

For context: over the past decade SA has significantly underperformed other emerging markets and developing economies due to declining capital investment, inadequate energy supply, unreliable logistics, high cost of doing business, a poor public-sector balance sheet and a weak fiscal position. However, there are green shoots of recovery, particularly on the energy and logistics front, while the fiscal outlook, though still worrying, could continue to benefit from steady GDP growth in the medium term.

We project nominal GDP growth that is marginally below the National Treasury’s current estimates in 2024/25 and 2025/26, due to lower real GDP growth and lower inflation respectively. Thereafter we project firmer nominal GDP growth as reforms bear fruit.

As we approach the budget speech on February 19, we believe much of the negative adjustments to the fiscus took place in the 2024 medium-term budget policy statement (MTBPS). Since then, revenue collection has improved, leading to the prediction of a mild overshoot over the medium-term expenditure framework (MTEF).

Furthermore, we see no major adjustments to spending apart from a larger wage bill. The net effect is a fiscal trajectory that is marginally better than the 2024 MTBPS. The recent suspension of US aid to SA could add some pressure to the spending trajectory, but we believe the Treasury will aim to reduce spending elsewhere in the budget to accommodate this expense.

As a result of a smaller nominal GDP profile the debt ratio is marginally worse than initial estimates. We estimate debt consolidation to take place after fiscal year 2026 as the primary balance grows. Our own gross debt-to-GDP forecast is projected to peak at 76% but end the MTEF in 2027/28 at 74.5%.

This is one of the key fiscal drivers of especially longer-dated bond yields in our fair-value bond model. We note, however, that history would suggest the risk lies in the fact that the debt profile does not stabilise within the MTEF and overshoots these projections.

Further details on the framework for an Eskom debt swap, and an updated macro review are expected in the budget speech. Under our expectations for the budget, we maintain our fair value for the 10-year bond yield at 10.4% and our fair-value range of R17—R17.50 for the dollar exchange rate. We also believe the positive risks to the fiscal trajectory are fully priced and improvements in the fiscal trajectory of SA will continue at a slow but steady pace.

Some of the developments we believe could be outlined by the minister in the 2025 Budget Review include: the excess cash raised from debt issuance this year is likely to go towards raising the government’s cash balance; the cash account will be raised, as opposed to drawn down, in fiscal year 2025, while the T-bill issuance will also need to be lowered sharply after the budget; the higher cash balances accumulated this year will be used to partially finance the gross borrowing requirement in 2025/26; and the Treasury may adjust the 75% noncompetitive fixed-rate bond proportion lower, given that non-comp take-up has done well this year.  

On the revenue side, there have been some improvements, with gross tax revenue collection running marginally ahead of the Treasury’s 2024 MTBPS forecast, up 6% year on year to date until November 2024 relative to the full-year estimate of 5.7%. For example, personal income tax collections benefited from two-pot withdrawals and above-inflation wage growth. Relative to the 2024 MTBPS, we estimate a R12bn overshoot in the personal income tax category in fiscal year 2025, with R10bn of this from the additional withdrawals from the retirement savings pot.

While the Treasury accounted for just R5bn in tax windfalls from the two-pot pension reform drawdowns, the SA Revenue Service has confirmed that as of October 29 2024 the direct tax liability from these drawdowns stands at R7.1bn. This, combined with VAT receipts from funds spent, could see slightly firmer revenue collection relative to 2024 MTBPS tax revenue estimates.

We therefore expect a mild revenue overshoot from multiple sources. We project main budget revenue estimates to be revised up by a cumulative R42bn over the MTEF, with an additional R10bn/year in revenue-raising measures expected to take this overshoot to R72bn. Put differently, we expect the government’s revenue profile to be revised R72bn higher relative to the 2024 MTBPS estimates. We also project a R7bn undershoot in VAT collection in the 2025 financial year (relative to MTBPS forecasts) due to a decline in imports and import VAT.

Corporate income tax (CIT) revenues are up 3% year on year to date, relative to the Treasury’s forecast for growth of just 0.4%. We project a R12bn revenue overshoot from CIT, as companies remain the biggest beneficiaries of debt repaid and higher consumption from the two-pot savings withdrawals. 

Looking ahead, growth in SA is expected to be steady, albeit slow, but with upside expected over the MTEF. We project a budget deficit of R339bn in 2025, R17bn smaller than 2024 MTBPS estimates. Revenue improvements, albeit modest, suggest a gradual fiscal recovery.

However, risks remain, particularly around debt stabilisation and macroeconomic headwinds. While upside risks to the fiscal trajectory appear priced in, improvements are likely to continue at a measured pace.

• Sumad is senior research analyst at Nedbank Corporate & Investment Banking.