Crunch time: Finance Minister Enoch Godongwana (left) will deal with Eskom’s debt of almost R4-billion. President Cyril Ramaphosa (right) has said the treasury is working on a sustainable solution for the debt.
Finance Minister Enoch Godongwana is expected to give clarity on the fate of the biggest pressures on the country’s public purse in his second medium-term budget policy statement next week.
Analysts will look out for what the minister says about Eskom’s debt and bailouts for other state-owned entities — as well as other big spending commitments such as the future of the public sector wage bill.
They will also watch for how the treasury’s economic forecasts have shifted since the February budget, which was delivered before Russia’s assault on Ukraine sent shockwaves through the global economy.
Shifts
Changes to nominal GDP and inflation will have an effect on the country’s fiscal position, said Gina Schoeman, head of research at multinational investment bank Citi.
“It is probably actually for the better … Because this year’s figures actually look really good. Not only do we have a much higher nominal growth rate, but we also have a huge revenue overrun,” she said.
But that doesn’t necessarily mean the second half of the fiscal year will be as rosy as the first, she added. “That is because of a turn in the terms of trade and commodity prices. So we will want to see what they are factoring in, because that is the biggest risk coming up in the outer years.”
The marked lift in inflation in the current fiscal year is expected to have boosted nominal GDP, which reflects the total market value of all goods and services and is evaluated at current prices. The improvement in nominal growth will ease both fiscal debt and deficit projections as a percentage of GDP.
As Investec chief economist Annabel Bishop has pointed out, the treasury forecast in February that annual consumer inflation would average 4.8% in 2022. But it looks more likely that inflation for the year will be closer to 7%.
Investec has forecast that gross loan debt will be about 70% of GDP, compared with the 72.8% predicted in the February budget. The upcoming three medium-term years are also set to improve as a result of inflation, Bishop said in a research note.
Moreover, the treasury forecast a budget deficit of -6% of GDP for 2022-23, but Investec now expects -5.6% because of improved nominal growth. The full benefit from high inflation is likely to mainly come through in the current fiscal year.
State-owned entities
Top of people’s minds as Godong-wana delivers his speech will be the fate of Eskom’s onerous debt, which has hamstrung the power utility and thus the country’s economy.
When he announced his plan to solve South Africa’s energy crisis in July, President Cyril Ramaphosa noted that the treasury is working to finalise a sustainable solution to Eskom’s debt, which now stands at R392.1-billion.
To date, Godongwana noted in the February budget speech, Eskom has been provided with R136-billion to pay off its debt, with a further R88‑billion allocated until 2025-26.
“We acknowledge, however, that Eskom is faced with a large amount of debt that remains a challenge to service without assistance,” he said.
“The national treasury is working on a sustainable solution to deal with Eskom’s debt in a manner that is equitable and fair to all stakeholders. Any solution will be contingent on continued progress to reform South Africa’s electricity sector and Eskom’s own progress on its turnaround plan and its restructuring.”
It is a foregone conclusion that the state will take a large chunk of Eskom’s guaranteed debt onto its own balance sheet.
Schoeman said the large commodity windfall, as well as the nominal GDP adjustment, means the government can take on at least R200‑billion of the utility’s debt.
Transnet will have also been factored into deliberations going into next week and will be high on analysts’ minds given the strike action at the state logistics company and the cost to the economy.
In his first medium-term budget policy statement, Godongwana provided no additional funding to state-owned entities.
But Transnet has recently indicated its preference for a degree of state funding. The entity could thus see an increase in its government guarantees. Transnet has not received a government guarantee since 1997.
Wage bill
With public sector salaries also in the spotlight, as a civil servant strike looms, analysts will look out for what adjustments will be made to the wage bill and what this will mean for headcounts.
The government has already upped its initial offer of a 1.5% pay increase to 3%, a move on which unions are divided.
In a recent joint statement with acting Public Service and Administration Minister Thulas Nxesi, Godongwana warned that higher-than-inflation or unaffordable adjustments to the wage bill will mean there will be less money to increase headcounts in critical frontline services.
Speaking at the release of a report on public services, government employment and the budget, Michael Sachs, the former head of treasury’s budget office, said the finance minister ought to set out how to marry the concerns regarding public sector pay with productivity.
The report notes that the current structure of collective bargaining focuses solely on the value of annual cost-of-living adjustments, without any meaningful discussion of productivity.
The report shows that attempts to reduce the wage bill will inevitably have their largest effect on core public services such as education and healthcare.
“The treasury is focused solely on fiscal consolidation, without apparent concern for the harmful effects on public services,” the report reads, adding that policy inconsistency is leading to an ongoing erosion of the capability of the state and the quality of public services.
[/membership]