Tough case: All eyes will be on Finance Minister Enoch Godongwana when he delivers his first medium-term budget speech, which comes amid Covid-19 and after the devastating July riots, and whether he will dish out additional revenue. (Madelene Cronje)
Finance Minister Enoch Godongwana will deliver his first medium-term budget speech next week.
Economists say the minister, who took over from Tito Mboweni a month after the devastating July unrest in KwaZulu-Natal and parts of Gauteng, will probably give more clarity on how South Africa’s economic prospects have improved since the start of the year and whether those gains can be used to cast a wider social safety net.
“I think the main thing the market is looking out for is the relative improvement between now and the February budget,” Momentum economist Sanisha Packirisamy said.
In February, when Mboweni last updated the public on the condition of the state purse, main budget revenue was projected to be R1.35-trillion, or 25.3% of GDP, in 2021-22. Since the 2020 budget review, which was delivered before Covid-19’s economic onslaught, the budget deficit had doubled and the in-year revenue shortfall was estimated at R213.2-billion.
Revenue recovered faster than expected, off the back of a commodity price windfall, Packirisamy noted. The country’s economic growth prospects also appear rosier than they did earlier this year after Statistic South Africa’s GDP rebasing exercise, which showed that the economy was 11% bigger in 2020 than previously estimated.
Hugo Pienaar, chief economist at the Bureau for Economic Research, said he would be looking out for “just how significant the revenue adjustment is upwards for the current fiscal year and what impact that has had on the deficit”.
“But, just as important, is whether that implies much for the medium-term fiscal output.”
Although government debt is the same, the debt ratio will look a lot better than it did in February, he said
If additional spending was to creep in, this would add to fears that South Africa’s debt position may deteriorate despite windfalls, Pienaar said.
Packirisamy said the market would be watching for how the government will dish out extra revenue.
After July’s violence and looting, which wreaked devastation on businesses, Mboweni announced a raft of fiscal relief measures to support the country’s bruised economy. These included the extension of the R350 social relief of distress grant to March next year. The riots reignited calls for a basic income grant.
The fiscal relief package was made possible by better-than-expected revenue collections supported by the commodities boom. When Mboweni announced the measures, he underlined the dire state of the country’s fiscal situation.
“Government finances remain at substantial risk, including due to the debt burden of over 80% of GDP and the rising debt service costs, which now consume more than R1 out of every R5 raised in taxes … Fiscal adventurism is not the solution to South Africa’s problems. We will continue our strategy of restoring the health of public finances,” he said.
In his 11 November medium term budget policy statement, Godongwana will mention the R1.5-billion support facilities the treasury has put together for businesses affected by looting and arson, said Sifiso Skenjana, the chief economist at IQbusiness.
“I think he will talk about the July unrest, particularly its impact on growth and what they’ve done to date to restore order and to restore some losses that were incurred.”
Packirisamy cited Reserve Bank governor Lesetja Kganyago’s recent warning that South Africa cannot afford to base permanent expenditure on a temporary commodity price windfall.
“The market will be looking out for any permanent expenditures being announced. So, for example, a basic income grant would be more of a permanent expenditure line item that would then rely on meaningful revenues.”
Pienaar concurred: “We should guard against lifting spending based on temporary windfalls.”
Social safety net
“Given how much focus there has been on social protection and a basic income grant, any sort of commentary in the review on that or whether the social relief or distress grant will be extended will be quite important,” he added.
Packirisamy agreed that the basic income grant, and the extension of the R350 grant beyond March, will probably be an important talking point: “We’ve seen a number of papers from academics and it has been hotly debated in that arena.”
“And there has been mention of employment growth being quite slow. Even though we have seen recovery in terms of economic growth, we have not seen the same type of recovery on the jobs front.”
Busi Sibeko, an economist at the Institute for Economic Justice, said it was clear the department of social development supported the basic income grant, but added: “Time will tell whether the treasury will come on board. It is possible that (Godongwana] may allude to continued research on the feasibility of a basic income grant. The minister is likely to re-emphasise that the social relief of distress grant will end in March 2022.”
Skenjana said the treasury was aware that any pronouncements on the grant could not be made before next February’s main budget review.
“I think they will leave it for now until the next budget while they continue to figure out where they are going to find additional funding for it. It is only R20-billion and not as big as R220-odd billion that a full-scale universal basic income would need, from a funding point of view.”
More bailouts on the cards?
South Africa’s cash-strapped state enterprises have been struggling to refinance their debts and the treasury has, to a large extent, been coming to their aid.
In last year’s medium-term budget Mboweni saved SAA from liquidation with a R10.5-billion bailout. The national carrier took to the skies again on 23 September after being grounded for a year and a half and, according to Skenjana, will not be the focus of this year’s medium-term budget.
Airports Company South Africa (Acsa), the Land and Agricultural Development Bank of South Africa and power utility Eskom will be the more topical state-owned enterprises this year, he said.
“The biggest risk item is Acsa. It has been one of the best performing state-owned enterprises and, pre-Covid-19, it had gone 19 years being profitable. With limited activity right now, Acsa is under a lot of pressure and I think there will be emphasis around it,” said Skenjana.
Acsa recently announced a net loss of R2.6-billion, citing hardships such as a drop in aircraft landing fees and aircraft parking fees caused by subdued travel during the pandemic.
Godongwana, Skenjana said, will probably also mention how the Land Bank “is doing following the first round of bailouts”.
The state-owned bank was given a lifeline of R7-billion over three years. This allocation was the only major bailout to a state-owned enterprise in the February budget.
The Land Bank’s woes stem from the drought that caused many of its customers to default on their loans and led to it battling to repay its debt, according to the United Nations Environment Programme.
The National Disaster Management Centre recently classified drought as a disaster by notice in the Government Gazette, showing a growing concern about the Land Bank.
Godongwana will also speak about Eskom, according to Skenjana, especially with the load-shedding cycle caused by frequent breakdowns in its generating units.
Eskom received more than R31-billion for the year, but this was money allocated in previous budgets and not in the February budget.
“I think there will be an additional emphasis on …. renewables and where we are in mitigation strategy with the energy constraints that we are experiencing,” Skenjana said.
The latest bid window five of the Renewable Energy Independent Power Producer Procurement Programme will add up to 2 600 megawatts of new generation capacity to the national grid. Last week, Mineral Resources and Energy Minister Gwede Mantashe named 25 preferred bidders, saying the project was expected to inject private sector investment of about R50-billion into the economy and create about 13 900 job opportunities.
Sibeko said it was possible that Godongwana would announce a bailout, but this depended on the extent of the economic fallout from Covid-19.
“I would argue that bailouts need to be considered for some municipalities that have been disproportionately impacted by the pandemic.”
“Generally, this budget is likely to maintain the status quo. It is unfortunate, because achieving a budget surplus through austerity will come at high costs. Austerity has been shown to fail on its own terms as well as shown to deepen the structural inequalities that exist.”