By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano.
On 21 February 2024, Finance Minister Enoch Godongwana will deliver the 2024 National Budget, a pivotal moment shaping the country's fiscal trajectory. Notably, the 2024 Budget comes during a crucial election cycle-arguably the most significant since the inaugural democratic elections of 1994. The 2023 Medium-Term Budget Policy Statement (MTBPS) highlighted a strained fiscal landscape due to lacklustre revenue performance and mounting expenditure pressures driven by the public sector wage bill, escalating debt servicing costs and the extension of the Covid-19 Social Relief of Distress (SRD) grant. The government faces substantial debt redemptions and the ongoing Eskom bailout (debt relief). During the MTBPS, gross tax revenue was projected to fall short of the 2023 Budget expectations by R56.8 billion in the current fiscal year (2023/24), with the shortfall expected to persist in the outer years (2024/25 to 2025/26) due to a weak starting point. This report outlines our expectations for the 2024 Budget review in light of the ongoing fiscal and growth challenges.
What the 2023 MTBPS signalled to be announced at the 2024 Budget
Economic growth projections remain steady
Since the 2023 MTBPS, economic growth performance has remained relatively stable. Consistent with our expectations, the latest Bloomberg consensus estimate for 2023 growth stands at 0.6%, with forecasts rising to 1.2% this year and 1.6% next year. We anticipate growth to reach 1.8% in 2026, aligning with the 2023 MTBPS projections. The economy continues to grapple with infrastructure deficiencies across energy, roads, ports, and rail, compounded by tight monetary policy and a sluggish external environment. These factors collectively weigh on government revenue performance.
Revenue challenges and expenditure pressures
Fiscal year-to-date (YTD) gross tax revenue has increased by 2.4% y/y, slightly below the 2.6% growth projected in the 2023 MTBPS and significantly lower than the 5.6% growth forecast in the 2023 Budget review. This is primarily due to poor corporate income tax (CIT) revenue collections, which have declined by 14.2% y/y, surpassing the 2023 MTBPS projection of a 12.9% decline for 2023/24. Meanwhile, personal income tax (PIT) collections have marginally exceeded expectations, growing by 8.3% y/y fiscal YTD, above the projected 7.7% y/y expansion for 2023/24. The slowdown in value-added tax (VAT) growth amid cost-of-living pressures, with VAT up by 6.1% fiscal YTD compared to 8.1% growth in 2022/23, further exacerbates revenue challenges.
On the expenditure side, spending pressures have surged, outpacing projections from the 2023 MTBPS and the 2023 Budget review. Debt service costs (i.e., interest payments) have increased by 17.1% fiscal YTD, exceeding the 14.9% 2023 MTBPS estimate. Non-interest expenditure has also risen significantly by 6.3% fiscal YTD, reflecting evident expenditure pressures. These trends, including ongoing poor revenue performance, are poised to widen the fiscal balance deficit, surpassing the R330 billion envisaged at the 2023 MTBPS. We anticipate the fiscal deficit to be approximately 5% of GDP in 2023/24, compared to Treasury's projection of 4.7% of GDP. The borrowing requirement has consequently surged, with the gross borrowing requirement standing at R442 billion fiscal YTD, higher than the R204 billion recorded for the same period in 2022/23. The 2023 MTBPS projected the borrowing requirement to reach R563.6 billion in 2023/24, up from R400.3 billion in 2022/23.
With 2024 being a pivotal election year, spending pressures could intensify the strain on the fiscal framework, especially in the short term. Significantly, the undisclosed ramifications of the government's potential decision to tap into the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to fund debt could also pose near-term implications on the framework, contingent upon the manner and extent of its utilisation.
Week in review
Gross foreign reserves amounted to $61.19 billion in January, reflecting a reduction of $1.33 billion from the $62.52 billion recorded in December 2023. The decline in gross reserves can be attributed to several factors, including a decrease in gold reserves due to a decline in the US dollar gold price, as well as valuation adjustments resulting from the stronger US dollar and foreign exchange payments made on behalf of the government.
Manufacturing output expanded by 0.7% y/y in December, marking a moderate improvement compared to the upwardly revised 2.5% y/y expansion (previously 1.9% y/y) in November 2023. The outcome fell below the Reuters consensus prediction of a 2.5% y/y expansion. However, seasonally adjusted output declined sharply by 1.7% m/m, reversing the 1.2% monthly expansion seen in the previous month, contradicting the monthly expansion signalled by the Manufacturing PMI Business Activity Index during the reference month. Despite the monthly decline in December, output improved in the fourth quarter, expanding by 0.1%, indicating a muted rebound from the 1.2% quarterly decline during the third quarter. This is aligned with our view and suggests that the economy likely avoided a technical recession in the final quarter of last year.
Week ahead
On Tuesday, mining production data for December 2023 will be released. In November, total mining output increased substantially, surging by 6.8% y/y, marking a notable acceleration from the 3.6% y/y (previously 3.9% y/y) expansion in October. Seasonally adjusted output exhibited a 2.1% m/m expansion, building on the prior month's growth of 2.0% (previously 2.1%). The sector appears poised to have contributed positively to GDP growth in the fourth quarter.
On Wednesday, the December retail sales data will be released. Sales volumes underwhelmed in November, despite Black Friday incentives. Volumes declined by 0.9% y/y, from a decline of 2.3% in December, underscoring the subdued consumer backdrop, with cost-of-living pressures weighing on discretionary incomes. The November outcome was consistent with sentiment indicators, especially in consumer facing sectors, which predicted weakening consumer demand into the 2023 festive season.
Appendix: The State of the Nation Address
Yesterday, President Cyril Ramaphosa delivered the State of the Nation Address (SoNA) of the sixth democratic administration. As anticipated, the Presiden's SoNA focused on key policy initiatives, achievements, challenges, and priorities. A critical summary of the speech is provided below:
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 7 Feb | SA | Gross Foreign Reserves $ billion | Jan | 61.2 | 62.5 |
| 8 Feb | SA | Manufacturing Production % m/m | Dec | -1.7 | 1.2 |
| Manufacturing Production % y/y | Dec | 0.7 | 2.5 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 13 Feb | SA | Mining Production % m/m | Dec | 2.1 | |
| SA | Mining Production % y/y | Dec | 4.9 | 6.8 | |
| 14 Feb | SA | Retail Sales % m/m | Dec | 0.4 | |
| SA | Retail Sales % y/y | Dec | -0.1 | -0.9 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 73,725.38 | -1.0% | -0.1% | -7.8% |
| USD/ZAR | 18.96 | 2.0% | 1.4% | 6.7% |
| EUR/ZAR | 20.42 | 1.0% | 0.0% | 7.5% |
| GBP/ZAR | 23.92 | 1.0% | 1.6% | 11.6% |
| Platinum US$/oz | 884.99 | -3.1% | -4.8% | -8.8% |
| Gold US$/oz | 2,033.18 | -1.1% | 0.2% | 8.4% |
| Brent US$/oz | 81.63 | 3.7% | 5.2% | -4.1% |
| SA 10 year bond yield | 10.76 | 1.9% | 1.9% | 3.1% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.6 | 1.2 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.8 | 1.5 | 1.8 | 1.8 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.0 | 3.7 | 4.5 | 3.9 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.8 | 4.7 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.8 | 4.8 | 4.6 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.05 | 17.52 | 18.33 |
