When the new South African Minister of Finance, Enoch Godongwana, delivers his first Medium-Term Fiscal Policy Statement (MTBPS) on November 11, 2021, he will need to focus on pro-business policies that drive sustainable economic growth to ensure that South Africa will avoid real hardship over the next two to three years, according to wealth management experts, Citadelle.

Citadel chief economist Maarten Ackerman said all eyes will be on Godongwana to see if he maintains the more economically prudent policies of his predecessor Tito Mboweni, designed to stimulate business growth, expand the tax system. and create jobs.

MTBPS should prioritize economic growth policies to lift South Africa out of its debt spiral

However, Ackerman does not expect Godongwana to make big changes to existing fiscal policies.

“Looking at where we are right now, we don’t really see any big announcements regarding tax changes or any other policy changes, so this is probably an update and an indication of what to do next. what we can expect when the national budget speech is delivered in February, ”he said.

George Herman, chief investment officer of Citadel, agrees: “MTBPS is often more about politics than hard numbers, but it tells the market where the ruling party is taking our finances. “

Ackerman points out that the South African economy has rebounded more positively over the past year than what was predicted, or budgeted for in the February national budget, in part due to the reopening of the global economy supporting strong exports of local commodities and agricultural sectors.

“It doesn’t mean we’re out of the woods yet, it just looks a lot better than the worst of the pandemic.

“What we hope to see is if the minister is going to be careful and take this opportunity to ‘bank’ some of the advantages that we have seen, because we are still in a very tight budget situation and, if we’re not getting the economy going very soon, we might have other fiscal challenges over the next two or three years, ”Ackerman said.

The balancing act

Godongwana will need to balance providing sufficient support to policy elements that stimulate sustainable and long-term economic growth, such as those that strengthen a stable supply of electricity, port restructuring, industrial development and remove any bureaucracy that has an impact on the economy. ease of doing business, while carefully managing policies designed to bridge the inequality gap in South Africa, such as social support, minimum wage and national health insurance proposal.

“But that’s where the problem lies: if we don’t restart the economy in the next two or three years, it will be very difficult to remove this social support and if we don’t get more tax revenue from it. faster diet. economic growth, we will have to borrow even more, ”Ackerman said.

“About 20% of South Africa’s tax revenues already go to debt servicing, which is why the long-term risk of a very gloomy fiscal environment persists if we do not urgently strengthen the economy and let’s not broaden the tax base. “

The revenue figures for 2021 are expected to exceed the February national budget figures by around 120 billion rand, Herman noted. “Unfortunately the government has already started spending this, that’s exactly where the uncertainty lies.”

There are several important social commitments on the cards and the question is: how permanent will some of this welfare spending become?

Debt-to-gross domestic product (GDP) ratio

Herman said South Africa’s debt-to-GDP ratio does not appear to stabilize at any time over the medium term. “Although it has been adjusted downwards thanks to the new higher GDP value, the debt-to-GDP ratio is on the rise again.”

Focusing on bond yields in the capital market, Herman believes these are attractively priced against fair value, which seems to indicate that the markets have factored in some risk factors and uncertainty. surrounding the MTPBS.

“So I don’t expect any shocks to the bond market emanating from the medium-term budget.” However, there was still a risk that if something in the medium-term budget were to trigger some form of panic, foreign investors who have always been sellers of South African bonds might be enticed to sell South bonds again. -africans.

If this happened, the rand would be affected the most by MTBPS.

Sanisha Packirisamy, economist at Momentum Investments, in the same way Herman van Papendorp, Head of Investment Research and Group Asset Allocation, identified eight things to watch out for in MTBPS:

• The bargain on commodity prices increases income: Although the rate of deterioration in South Africa’s fiscal position has eased considerably, the recent reversal in prices of South Africa’s commodity exports highlights the risk of the temporary nature of the windfall. commodity prices. In our view, in the absence of additional permanent revenue structures, the risks to fiscal consolidation remain high in the medium to long term.

• Improved budget and debt ratios: Apart from an upward revision of nominal gross domestic product (GDP), the projected fiscal and debt ratios should appear healthier given the better-than-expected revenue outlook for the current fiscal year. A sharp rise in commodity prices supported an outperformance of mining revenues.

• The Treasury’s determination to restrict spending tested: If a more permanent expansion of the subsidy system is introduced, it is likely that a more permanent income stream will need to be considered to limit the impact on the tax system.

• Upward risk on the public sector wage bill: After several rounds of cuts in the budget for goods and services, a new redefinition of spending priorities can, in our opinion, negatively affect service delivery. As a result, above-budget wage settlements continue to pose an upward threat to public spending.

• Unbudgeted bailouts: Given the limited room for maneuver on the revenue front, the extent to which the government strives to reduce additional spending by struggling SOEs will determine how successful it is in stabilizing the debt ratio over the medium and long term. term.

• The momentum behind structural reforms: Despite several economic and political reform efforts, relative governance measures have yet to show a clear improvement over a global comparison.

• Tax responsibility pays off: Highly credible fiscal frameworks improve access to financial markets. Countries with higher levels of credibility tend to face lower interest rates on government bonds and cheaper financing.

• Implications for SA sovereign rating: Although South Africa’s fiscal and debt ratios are likely to show notable improvement, debt remains at high levels and the pace of reform efforts remains modest against a backdrop of sluggish growth. Given the persistent fiscal and growth risks over the medium term, we believe the SA sovereign rating outlook bias is downward over the medium term, despite an improvement in the short term outlook.

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