Public Debt in South Africa

South Africa - Public Debt

Government unveils FY 2022–2023 budget with an improved fiscal outlook

On 23 February, the government presented the annual national budget for the fiscal year 2022–2023, which begins on 1 April 2022. Following the delayed 11 November 2021 presentation of the medium-term budget, the new budget ensures continuity, improves the fiscal consolidation path and incorporates market-friendly policies, in hopes of boosting job creation. That said, challenges to the implementation of the budget remain.

The policy document revised the government’s forecast for the consolidated budget deficit to 5.7% of GDP for the current fiscal year—which runs until 31 March 2022—less than the 7.8% of GDP forecasted in November 2021. This reflected a combination of better-than-expected revenue due to elevated export commodity prices, and marked underspending in the period.

Meanwhile, barring any major unbudgeted commitments, the gradual fiscal consolidation path will continue. The shortfall for FY 2022–2023 was unchanged at 6.0% of GDP from the November projection, while the deficit for FY 2023–2024 was downwardly revised to 4.8% of GDP from November’s forecast of 5.3%. This will be possible partly due to the improved revenue coming from booming export commodity prices like gold, maize and palladium, which will be used to reduce both taxes and the deficit—although no permanent measures were put in place as uncertainty over the duration of the boom lingers.

With regard to spending, the government allocated ZAR 5.2 billion (approximately USD 0.3 billion) for tax breaks and relief measures, extending the pandemic monthly grant for the unemployed another year, trying to keep fuel prices in check, and delivering tax breaks for working people. With these measures, the government hopes to bolster consumer spending and investment, which should stimulate the economy in turn.

Moreover, spending on health is set to increase to ZAR 259 billion (USD 16.4 billion), amid the acquisition of Covid-19 vaccines. Furthermore, the budget sees increased expenditure for free higher education and a new job creation program. Still, debt-servicing costs will consume a notable chunk of spending. That said, the debt trajectory is expected to improve, with the debt-to-GDP ratio seen peaking in FY 2024–2025—a year earlier than previously forecast—at 75.1%, down from November’s 78.1% estimate.

That said, the budget faced backlash as it fails to directly tackle the biggest headwinds to economic activity: Recurrent power cuts and struggling state-owned enterprises. Eskom, the country’s public electricity company, faces a USD 26 billion debt. Furthermore, the document does not directly address inequality. According to the World Bank, South Africa is the most unequal country in the world, and race plays an important role in determining educational and labor market prospects and success.

Moreover, key downside risks to the projected spending and fiscal consolidation paths remain: The resistance to restraining public-sector wages, the heavily indebted state companies, and the uncertain duration of booming commodity prices. Further, projected higher domestic and global interest rates will bode ill for the payment of debt servicing costs, which will restrain spending on more productive uses.

Commenting on the balance of risks, analysts at the EIU added:

“Politics will weigh heavily on the outlook in advance of the 2024 general election, but Mr. Godongwana has more political clout within the ANC than his respected predecessor, Tito Mboweni, giving him extra authority to stick to a prudent agenda. […] Despite some encouraging signs, the risk of wasting the opportunities generated by higher commodity prices, via policy missteps and exogenous shocks, such as those arising from the war in Ukraine or a pandemic resurgence, remains substantial.”

FocusEconomics Consensus Forecast panelists see the fiscal deficit reaching 5.9% of GDP this year, before easing to 5.3% of GDP in 2023.