OSAGYEFO MAZWAI: Budget 2025: Potential macroeconomic outlook revisions must be seen in context

Later today, finance minister Enoch Godongwana takes on the daunting task of presenting a sustainable budget that incorporates the distinct objectives of the various political parties that are members of the government of national unity (GNU). 

He will need to continue supporting the goals of fiscal consolidation/austerity, while ensuring the provision of funding for broader societal development and economic growth.  

Against this backdrop it would be prudent for the market to consider any revisions to projections within a holistic context, taking into account changing growth fundamentals, global economic and geopolitical dynamics, volatile trade patterns, and cautious monetary policy, among others.

This is significant because the medium-term budget policy statement (MTBPS) caught many by surprise due to some of the negative revisions to the Treasury’s forecasts for economic growth, debt-to-GDP and revenue collection.

Relative to the 2024 budget policy statement, the Treasury revised debt-to-GDP to peak higher, and for both real GDP growth and revenue to come in lower.  

Political dynamics 

The need for incorporating the policy positions of the multiple political parties of the GNU was apparent during the MTBPS, when deputy finance minister Ashor Sarupen of the DA applauded the statement and acknowledged the incorporation of specific DA fiscal policy positions in the budget.  

But there is now an elephant in the room in the form of funding for state-owned enterprises (SOEs). There may be a requirement for the Treasury to provide additional support to Transnet (and potentially other SOEs), which contradicts the DA’s position.

However, there is a broad-based view that if the state provides additional support to SOEs this will be packaged in a similar way to Eskom’s debt relief package, which has explicit conditions for the fiscal support.   

Debt-to-GDP 

With that in mind, it is worth juxtaposing this with the December 2024 release of the S&P Global assessment of SA’s credit rating, in which one of the main risks to SA’s debt-to-GDP outlook was its view that the Treasury might have underestimated the support needed for SOEs. Despite this, the ratings agency revised SA’s rating outlook from stable to positive.

Even if the Treasury revises the debt-to-GDP outlook upwards, it should be within broader market expectations, if the ratings agencies are a guide. The market ought not be surprised unless the upward revisions are of material consequence (higher than even S&P Global’s projections, which is unlikely).  

Growth 

Another key factor is the forecast for real GDP growth over the next three to five years. It is growth that will materially affect debt dynamics in SA, particularly in an environment where it is difficult to adopt more aggressive fiscal austerity measures.

Fiscal support of the economy and the funding of social protection programmes are paramount. The delivery of services to the people will also need to be funded, although the Treasury needs to find new ways of ensuring proper spending and accountability in terms of the Public Finance Management Act (PFMA) and the Municipal Finance Management Act (MFMA) respectively.

 There will be three key drivers for how the Treasury captures potential growth outcomes. The first is the relative success of structural reform in the country.

Better energy security did not find full expression in our third quarter GDP growth, but as we alluded to at the time it would take greater confidence in the permanence of reduced or no load-shedding for firms to invest in productive capital and output. The same is true of logistics.

The second key input would be how the Treasury captures ever-evolving monetary policy expectations given that the market is expecting the Reserve Bank to adopt more caution in cutting interest rates, primarily due to dynamics in the US as well as a presumed objective of anchoring inflation closer to 3%.

The third consideration will be how the Treasury sees US trade policy affecting SA and its main trade partners (the EU and China).  

Municipal financing 

Finally, President Cyril Ramaphosa spent a decent amount of time during the recent state of the nation address (Sona) on issues at a local government level. In summary, his points suggested that the current municipal funding models were outdated and unsustainable.

Godongwana may give some indication on how the Treasury will try to solve for municipal funding challenges, which are important for the execution of the local government aspects of phase two of Operation Vulindlela.

The president indicated that there was an intention to ring-fence water and electricity functions at a municipal level, which may better ensure the water and electricity revenues are allocated towards the specific purposes of maintaining and expanding municipal water and electricity infrastructure.

However, in the medium term there may be some need for fiscal support. This could affect spending projections and debt-to-GDP too.  

There will be several moving parts in the 2025 budget policy statement, but changes to macroeconomic forecasts should be considered within their context. It should not be a surprise if the Treasury sees the debt-to-GDP ratio peaking higher, and would be a welcome surprise if debt-to-GDP peaks lower than expected and sooner. 

What may drive this would be a better growth outcome, although monetary policy and global economic dynamics could offset envisaged gains from a structural reform perspective. The continued need for government spending on social programmes, service delivery and supporting SOEs and municipalities may also hinder progress.  

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