The supportive global conditions that spurred the economic recovery in 2021 are dissipating, and domestic shocks – Particularly power cuts – have lowered economic growth and confidence. A broad slowdown in global growth and high inflation are forecast. Rapid and decisive implementation of structural reforms, especially in the energy sector, supported by a clear and stable macroeconomic framework and improved state capability, remain crucial to improve the economy’s productive capacity and international competitiveness.

Key Issues:

• Since the 2022 Budget Review, global and domestic risks to the economic outlook have materialised, including slower global growth, higher levels of inflation, accelerating interest rate increases and intensified power supply interruptions
• Real GDP is projected to grow by 1.9 percent in 2022, compared with 2.1 percent estimated in the 2022 Budget, and average 1.6 percent from 2023 to 2025
• Investment and employment levels remain lower than before the COVID-19 pandemic and lag behind the recovery in real GDP. Households are under increasing pressure from higher inflation and interest rates
• A sustained improvement in growth and employment outcomes requires rapid and decisive implementation of economic reforms, supported by South Africa’s clear and stable macroeconomic framework – and improved state capacity

The fiscal position has improved since the 2022 Budget as a result of better-than-expected revenue collection. Government will use this revenue to increase spending in health, education and local government free basic services, infrastructure, and security and safety. At the same time, it will narrow the budget deficit, and address fiscal and economic risks posed by Denel, SANRAL and Transnet. Government remains committed to returning the public finances to a sustainable position.

Key Issues:

• Government is returning the public finances to a sustainable position. Net loan debt – gross loan debt less cash balances – will stabilise at 69 percent of GDP in 2024/25
• Main budget non-interest spending will grow slightly above consumer price index (CPI) inflation in the outer two years of the medium-term expenditure framework (MTEF) period. More resources are added to health, education, local government free basic services, infrastructure, and safety and security
• In a volatile global environment, the fiscal strategy reduces risks to the economy and the public finances over the medium term. Government will use a portion of revenue improvements to narrow the budget deficit and keep debt stabilisation on track. In-year allocations are made to mitigate economic and fiscal risks associated with Denel, the South African National Roads Agency Limited (SANRAL) and Transnet
• To ensure Eskom’s long-term financial viability, government plans to take over a portion of the entity’s R400 billion debt
• The consolidated budget deficit is projected to narrow from 4.1 percent of GDP in 2023/24 to 3.2 percent of GDP in 2025/26
• Risks to the fiscal outlook include further slowdowns in economic growth, higher public-service wage costs, contingent liabilities of state-owned companies and the introduction of unfunded spending programmes

“Democracy will have little content, and indeed, will be short lived if we cannot address our socioeconomic problems within an expanding and growing economy.”

Nelson Mandela

Minister of finance Enoch Godongwana has tabled his MTBPS. We summarise the key issues below:

• South Africa is restoring the health of its public finances just as the world economy is taking a dangerous turn for the worse. As a result of the COVID-19 pandemic and the continuing war in Ukraine, many developing countries face the prospect of sovereign debt crises, currency devaluation and soaring inflation without the benefit of fiscal buffers. South Africa’s challenges are significant, but its stable macroeconomic policies and efforts to return the public finances to a sustainable position mean that the country is in a better position to weather the storms that lie ahead
• As a result of determined and disciplined budgeting, supported by high commodity prices, the budget deficit is narrowing. Fiscal consolidation will soon come to a close. The country’s debt burden remains substantial, having increased sevenfold from R577 billion in 2007/08 to over R4 trillion in 2021/22. Yet by the end of 2023/24, revenue will exceed non-interest spending for the first time in 15 years. Net government debt will stabilise at 69 percent of GDP in 2024/25
• These achievements will enable government to begin rebuilding fiscal space and renew real spending growth in key policy areas that support the economy. Medium-term spending increases are targeted to increase the number of teachers and police, retain health workers, and improve critical water, roads and rail infrastructure. These actions will help unblock some of the bottlenecks restricting economic activity, complemented by stable public finances that promote higher investment
• South Africa’s economic growth rate is far too low to address its poverty and unemployment challenges. Rapid and decisive action is needed on reforms to lift the economic growth rate. Government’s structural reforms are centred on increasing electricity production and removing associated regulatory constraints, building confidence to support increased private investment in infrastructure, and creating the conditions in which small and large businesses can flourish and create many more jobs. Over the medium term, government will also strengthen the capacity of the state, including funding investigative and prosecutorial agencies to root out corruption and bolstering financial management in municipalities
• In a volatile global environment, the medium-term fiscal strategy reduces risks to the economy and the public finances. The contingency reserve will be increased to improve responsiveness to emergencies such as natural disasters. Funds from higher-than-expected revenues will be set aside to reduce the gross borrowing requirement. And in the current year, a portion of higher revenue is used to reduce fiscal and economic risks presented by Denel, the South African National Roads Agency Limited and Transnet
• In addition, government plans to take over a portion of Eskom’s R400 billion debt to enable the utility to restructure, applying strict conditions to safeguard public money. Eskom is the biggest known risk to the economy and the public finances. A lower debt burden will enable Eskom to implement a viable unbundling process and make resources available for investment in critical electricity supply and transmission infrastructure

Stabilising the public finances to Weather the global storm

Key Issues:

• South Africa is restoring the health of its public finances during a global slowdown marked by high levels of economic risk and fiscal distress, particularly for developing countries
• In 2023/24, a primary budget surplus – revenue exceeding non-interest spending – of 0.7 percent of GDP is expected. Gross debt is now projected to stabilise at 71.4 percent of GDP in 2022/23 – more quickly than previously expected
• Urgent action is required to accelerate growth-enhancing reforms, especially to boost electricity supply. Real GDP growth is forecast to average a moderate 1.6 percent over the next three years
• Government will focus on ensuring clear and stable macroeconomic policies, implementing economic reforms and addressing key enablers to growth and state capability
• Higher-than-anticipated revenues will be used to reduce the gross borrowing requirement, support spending priorities and reduce risks to the fiscal outlook

Sincerely,