Sanisha Packirisamy, Economist at Momentum Investments

• Fixed income and currency markets reacted negatively to the announcement that government’s main budget deficit ratio was revised wider by an average of 0.4% between fiscal year (FY)24/25 and FY26/27 in the medium-term budget policy statement (MTBPS) compared to the national budget in February 2024. This outcome was slightly worse than investors’ expectations based on a slightly larger-than-anticipated gross tax revenue shortfall of R22.3 billion for FY24/25. Markets were disappointed in the unchanged stance on issuance in spite of large cash balances.

• The use of the gold and foreign exchange contingency reserve account (GFECRA) profits continues to allow for a projected stabilisation in the government debt ratio over the medium-term expenditure framework (MTEF).

• Government initially estimated that the two-pot retirement system would yield R5 billion in additional taxes collected in FY24/25 as fund members access once-off withdrawals (this was based on an assumption of R23 billion in withdrawals). As noted in the February 2024 budget, this was a conservative projection, but it was maintained in the MTBPS. In the economist question-and-answer (Q&A) session, the SA Revenue Service (SARS) confirmed that R7.1 billion had already been collected in additional taxes (based of 1.6 million applications received, of which 1.5 million had been processed). SARS pointed out that R750 million in debt that was owed was settled. The SA Reserve Bank (SARB) has modelled a moderate withdrawal scenario (R40 billion in Q4 2024 and R20 billion spread over 2025) which could lead to R19.9 million in additional personal income tax (PIT) in fiscal year (FY) 24/25. In their high withdrawal scenario, based on withdrawals totaling R100 billion in Q4 2024 and R40 billion spread over 2025, the estimated additional PIT for FY2024/25 rises to R41 billion. Industry estimates range between R10 billion and R15 billion in additional taxes raised, exceeding Treasury’s estimates. This could lead to a positive surprise on revenues if materialised. Moreover, efficiency gains at SARS could drive additional positive revenue surprises over the MTEF.

• Despite the new administration navigating political hurdles, Treasury has demonstrated its resolve to uphold fiscal consolidation, keeping the primary balance in surplus over the MTEF. Nonetheless, market participants remain wary of the difficult fiscal choices ahead, particularly regarding the need for increased support to state entities, managing the rising cost of living impacting civil servants in future wage negotiations, and broadening government aid for the most vulnerable on a more sustainable basis.

• Treasury’s revised medium-term economic outlook appears prudent, aligning closely with our forecasts and the consensus estimates from Reuters. Government’s projected average growth rate of 1.5% for 2024 to 2026 (previously 1.6%; however, risks to the outlook are now seen as being more balanced than in February 2024) is only marginally below our expectation and the Reuters consensus of 1.6%. Likewise, Treasury’s forecast for headline inflation at 4.5% (previously forecasted at 4.7% in February 2024) over the medium term is only slightly below our estimate of 4.7% and aligns with the Reuters consensus figure of 4.5%.

• The R22.3 billion expected undershoot in gross tax revenues for FY24/25 is largely driven by disappointing fuel levies and lower import value-added taxes (VAT). While lower diesel usage by Eskom has contributed to a lower collection in fuel levies, a significant R9 billion diesel rebate was the main contributor. Lower imported VAT collections were associated with energy supply improvements leading to reduced imports of alternative energy components (e.g. solar panels). In our view, corporate income tax (CIT) could get a boost in December, a seasonally strong month related to company reporting cycles, while PIT could jump on the September 2024 implementation of the two-pot retirement reform.

• Government predicts that the revenue buoyancy (growth in tax revenue per unit of economic growth) is expected to recover from 0.95 in FY24/25 (previously estimated at 1.33 in the February 2024 national budget) to 1.09 in the following two fiscal years from a previous estimate of 1.11. Government anticipates a recovery in tax buoyancy driven by improved economic growth and further gains in tax compliance/administration. CIT buoyancy is expected to peak at 1.35 in FY26/27, while PIT buoyancy is set to rise to 1.1 over the same period. Treasury’s assumptions on key commodity prices are broadly in line with the Bloomberg median consensus forecast for the next three years but ongoing logistics woes are, in our view, likely to pose a risk to CIT buoyancy ratios.

• At a projected 5% of gross domestic product (GDP), SA’s expected consolidated budget deficit ratio for FY24/25 (and 4.3% for the next) looks more concerning than the Reuters median consensus estimate of 4.4% for FY24/25 (and 3.9% for FY25/26). Government’s forecasts, however, compare favourably with a 5.6% fiscal deficit projected for emerging markets (EM) in 2024 and 5.5% in 2025, as estimated by the International Monetary Fund (IMF) in its October 2024 World Economic Outlook update; as well as the 5% and 4.5% deficit ratios projected for developed markets (DM) for the same period. Although the Reuters consensus is more bullish on its fiscal forecasts in the near term than Treasury, its forecast for a narrowing in the deficit to 3.3% the outer year of the MTEF (FY27/28) broadly matches Treasury’s projection of 3.2%.

• Treasury confirmed that its plans to maintain a primary budget surplus in the MTEF remain firmly on track, with this surplus projected to rise to 1.8% of GDP by the final year of the MTEF. Treasury estimates the gross debt-toGDP ratio will peak at a higher 75.5% in FY25/26 (0.2 percentage points higher than February’s estimate) before declining. This compares with an expected debt ratio of 69.9% for EMs in 2024, rising to 71.9% in 2025. Despite the average debt ratio in EM stacking up only slightly lower than SA’s, Treasury noted that in 2023, SA’s debt ratio ranked 18 percentage points higher than the median EM. Nevertheless, SA’s debt ratio is still lower than the 109.4% projected for DMs in 2024, lifting to 111% by 2025. While the debt ratio itself is not particularly alarming compared to global standards, the increase in the debt ratio (rising by 48.1 percentage points between FY08/09 and FY2023/24), coupled with a corresponding rise in debt-service costs as a percentage of GDP (an increase of 2.7 percentage points over the same period) places SA at a disadvantage compared to its EM counterparts.

• No changes were made to government’s plans to draw down an additional R25 billion each in FY25/26 and FY26/27 from the GFECRA to reduce borrowing, and which will consequently arrest the rapid growth in debt-service costs. Although the government asserts that this strategy will lower the risk premium, boost investor confidence, and increase the demand for domestic assets, we would have favoured a more defined application of the funds (for instance, addressing Transnet’s capital expenditure challenges) that prioritised fixed investment (more conducive for sustainably higher trend growth) over recurrent expenditures.

• The country’s rating strengths, such as its significant external asset position, minimal levels of foreign currency debt, diverse economy, strong financial system, deep and liquid capital markets and freely-floating exchange rate, indicate that the threshold for downgrading SA to a single B rating remains relatively high, while a further commitment to fiscal consolidation, tangible progress on energy supply, and the promise of further structural reform efforts to lift trend growth and alleviate poverty and inequality should help to lower the hurdle for a rating upgrade. While we could see a favourable shift in the outlook from neutral to positive as early as the first half of next year, rating agencies are likely to seek concrete evidence of implemented structural reforms and fiscal discipline that lead to a notable reduction in the budget deficit and a stabilisation of SA’s debt ratio.

You can read Momentum’s full commentary on the MTBPS here.

ENDS