• Editor

Russo-Ukranian war and its impact on Godongwana's plans

The 2022 Budget Speech was completely overshadowed by the tragic events in Ukraine. However, it also reflects the fact that there was little drama in the Budget this year, and frankly, that is how it should be. The Budget should be boring and predictable, and devoid of existential angst. Progress in that direction is therefore welcome.

There has been extensive commentary on the Budget already, so it is worth focusing on some of the points that received less coverage and ask how the Russian invasion thousands of miles away might impact some of the issues Finance Minister Godongwana spoke about.

Commodity boom

The first point to make is that the government’s finances are in better shape largely thanks to a supportive global environment, particularly in the form of elevated commodity prices. Tax revenues in the fiscal year that will end soon will now likely exceed the updated October projections by R62 billion, with company tax a big (but not the only) reason.

Commodity prices have increased further over a broad front in recent days due to fears that the increased economic isolation of Russia could lead to shortages of the raw materials it exports. Russia is of course a major exporter of oil and gas, but also of wheat coal, palladium, nickel and aluminium. Ukraine is also a major exporter of agricultural commodities, and one will have to assume supply disruptions if the conflict escalates.

Higher oil prices will feed into existing global inflationary pressures and could lead to central banks raising interest rates at a faster pace. However, while the current uncertainty lasts, central banks could err on the side of caution.

Importantly, the price increases signal supply shortages while demand is expected to remain robust. This is indicative of still-solid global growth. We are not at the point where higher commodity prices and rising interest rates trigger a global recession yet.

While South African consumers are likely to pay more for food and petrol (and therefore the government did not raise the fuel levy for the first time since 1990), our own exporters should benefit from these higher prices.

Chart 1: Global commodity price indices

Source: Refinitiv Datastream

Conservative assumptions

That said, the government is wisely not banking on commodity prices remaining high. It has used the current windfall to reduce debt levels and extend the R350 per month Covid-grant for another year. But any increases in the social safety net beyond next year will have to be funded by a permanent increase in tax revenues, not borrowing or hoping for high commodity prices. No significant tax increases are pencilled in for the next three years.

Chart 2: Debt-to-GDP projections

Source: National Treasury

Thanks to the revenue overshoot and reasonable discipline on the spending side, the debt-to-gross domestic product (GDP) ratio is now expected to peak earlier and at a slightly lower level than projected in the October mini-budget, namely 75.1% in 2024/25 (chart 2). By that point, the government expects to run a primary surplus, meaning that revenue will slightly exceed non-interest spending. The budget deficit will then entirely consist of interest payments in excess of R300 billion per year (chart 3).

This remains the key reason for staying on the fiscal consolidation path: interest payments are already the fastest growing item in the Budget and are crowding out other worthy areas of spending. Since South African government borrows at a high interest rate (6.2% on a weighted basis), debt service costs compound quickly.

Chart 3: Main budget balance projections

Source: National Treasury