Economics weekly
By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano.
The 2024 National Budget provides a delicate balancing act between swelling spending pressures and limited revenue sources. Persistent weak economic growth and a rising population has resulted in more people being left on the fringes of the economy, unable to contribute meaningfully to the tax base but instead depending on social welfare. Despite this, Treasury has once again presented a positive fiscal trajectory. By allowing bracket creep in personal income taxes and medical tax credits (reducing real disposable income), raising excise taxes, and applying a 15% tax rate on multinational companies with profits above €750 million, Treasury expects to raise over R55 billion in revenue in the most palatable way possible. 1 Given elevated transport and input costs, fuel levies are untouched, which is also in line with intentions to reconfigure the petrol price equation. As expected, the Social Relief of Distress (SRD) grant has been extended and previously announced expenditure cuts have proven difficult to implement as dilapidated service delivery forces a re-capacitation of the state. 2 In addition to fostering private sector participation, government further cemented the reform agenda and capital investments (average 10% increase, with large projects overseen by the Infrastructure Finance and Implementation Support Agency) as the driver of growth and development. Until then, budgets will remain a painful reminder of past missteps and that embedding sustainability will demand sacrifices.
The other key pain point in public finances is the accumulation of debt and how much it now costs to carry that debt. Higher interest rates across the globe are charting an untenable path for heavily indebted emerging markets. It now costs the government more than 20% of revenue to service debt, and the only way to limit further escalation in this is to turn the non-interest budget balance to a surplus, which Treasury expects to happen in the 2023/24 fiscal year. 3 This would allow Treasury to reduce its borrowing requirements and stabilise debt at 75.3% in 2025/26, versus 77% previously. Importantly, this promotes a reduction in the risk premium demanded when investing in South African assets, a turn in sovereign debt ratings, and a crowding-in of private investment. Over time, a positive loop is created, reinforcing sustainability and development.
In the meantime, Treasury has had to come to the rescue of key state-owned enterprises (SOEs), Eskom and Transnet. Eskom's debt relief amounts to R250 billion, Transnet's guarantee is R47 billion - both with stern conditions to implement sound turnaround plans which include liberalisation of their markets. As a stopgap, Treasury will employ R150 billion of the unrealised valuation gains in the Gold and Foreign Exchange Reserve Account (GFECRA) (see overleaf) to reduce both borrowing and service costs over the medium term. The full details of the procedures (liquidating and sterilising the gains to avoid a counter impact on monetary policy) are forthcoming. Ultimately, tapping into buffers requires prudence, without which, both Treasury and SARB could be left more vulnerable. Other forthcoming details are on fiscal anchors.
As per usual, Treasury faces several implementation risks. These include weaker economic growth and lower revenues, higher inflation and wage bill contention, social and climate-disaster spending pressures, contingent liabilities related to public sector institutions, as well as higher borrowing costs.
Click here to view our FNB National Budget Speech 2024 key take aways panel discussion video.
Gold and Foreign Exchange Reserve Account (GFECRA)
This account captures losses and gains related to valuation adjustments on South Africa's gold, foreign exchange reserves and forward contracts. The funds are meant to cover foreign exchange payments and ensure liquidity in times of external stress. The foreign currency denomination of this account dictates that if the rand weakens, the value of the holdings rise in South Africa's favour. The account is managed by the South African Reserve Bank on behalf of National Treasury and thus the current unrealised gains amounting to R500 billion are reflected as assets on Treasury's balance sheet and liabilities on the SARB's balance sheet. Had valuation adjustments resulted in a loss, the opposite would apply, and Treasury would be liable to transfer the value of the loss to the SARB. Given the renowned volatility of the rand, it is prudent to use this buffer at a minimum. In addition, the cost of realising the gains, either by selling foreign reserves or printing rands, also needs to be considered. Given SA's low reserves position relative to peers, the first option is undesirable. However, printing the rand also has ramifications such as loosening financial conditions to the detriment of a currently restrictive monetary policy stance and increasing inflation. Therefore, tapping into this account requires financial sector interventions by the SARB to drain excess liquidity, which presents interest costs.
To cater for this, a three-bucket system is pending finalisation. One bucket would hold some of the gains to cater for any adverse valuation adjustments. The second would cater for costs that the SARB would incur from realising the gains. The last would be the funds available to Treasury. Ultimately, the decision to use these gains to temper the debt profile and interest costs is a necessary stopgap during a period of heightened risk and interest rates. The gains will be in tranches of R100 billion in the upcoming fiscal year and R25 billion in each of the outer years. The likelihood of further transfers is high, given budget risks.
1 Over the medium term. There are also non-tax revenue increases of R9.5 billion from royalties, sale of strategic oil reserves, valuation gains from foreign currency transactions and reduction of SACU payments. Withdrawals from the two-pot system should also support higher revenues.
2 There is, however, a reduction in spending baselines, projected underspending, and a drawdown on the unallocated reserve.
3 The deficit that is inclusive of interest costs would narrow from 4.7% in 2023/24 to 3.4% of GDP by 2026/27.
Week in review
The leading indicator declined by 0.8% m/m in December 2023, following a 0.4% decline in November. Four of the nine constituent variables contributed to the decline in the leading indicator, outweighing increases in the remaining five. The most significant decline was recorded in the number of residential building plans approved. Despite the monthly decline in the leading indicator over the last two months of 2023, the indicator expanded by 0.7% q/q, consistent with our view that GDP growth rebounded in the final quarter.
The Quarterly Labour Force Survey (QLFS) data, a household-based employment survey not seasonally adjusted, revealed a slight uptick in the official unemployment rate to 32.1% in 4Q23 from 31.9% in the previous quarter. While this rate is 3.2ppts lower than the peak of 35.3% in 4Q21, it remains 3.0ppts higher than the 29.1% recorded in 4Q19, indicating persistent structural labour market challenges. Employment saw a mild decline of 21 587 jobs to 16 723 195 during the reference quarter, breaking the eight consecutive quarters of net job gains momentum. The increase in unemployment by 46,304 to 7 895 434 resulted in the reported uptick in the official unemployment rate. Despite this quarterly decline, jobs increased by 788 701 compared to the corresponding quarter in 2022 and were 302 926 higher compared to the same quarter in 2019, reflecting a relatively modest upward trend.
Consumer inflation lifted to 5.3% in January from 5.1% in December, with monthly pressure of 0.1%. Driving the monthly pressure was core inflation, which added nearly 0.2ppt, food and non-alcoholic beverages (NAB) added over 0.1ppt but fuel shaved off over 0.2ppt. Core inflation lifted by 0.3% m/m and 4.6% y/y, the monthly lift was primarily driven by financial services and vehicles, while public transport mitigated some of the pressure. Fuel fell 5.2% m/m but recorded inflation of 3.3% y/y. Food and NAB lifted by 0.6% m/m but continued its deceleration to 7.2% y/y from 8.5% previously. We expect further upward pressure on headline inflation in 1Q24, as periodical survey outcomes push core inflation up and fuel price inflation lifts. In the next print, headline inflation could accelerate to 5.6%
Week ahead
On Thursday, data on Private Sector Credit Extension (PSCE) for January will be released. PSCE outperformed market expectations and accelerated to 4.9% y/y in December, from 3.8% in November, on the back of faster growth in corporate credit which outweighed the slower household credit uptake. Corporate credit quickened to 5.0% from 3.1% previously, with all sub-components improving in December, spearheaded by instalment sales. By contrast, the slowing trend in household credit persisted, registering 4.3% from 4.8% previously, largely due to the continued moderation in unsecured credit uptake.
Also on Thursday, data on producer inflation for January will be published. In December 2023, producer inflation decreased to 4.0% y/y from 4.6% y/y in November. Monthly pressure remained steady at -0.6%, unchanged from the previous month. Annual intermediate producer inflation remained in deflation, marking the sixth successive month of deflation. We anticipate producer inflation to have slightly increased at the beginning of 2024, reflecting fuel price increases in January 2024 compared to January 2023.
Lastly on Thursday, balance of trade data for January will be released. The trade balance surplus was R14.1 billion in December 2023, reflecting a slight decline from the R20.5 billion surplus in November. Exports declined by 11.5% m/m to R163.9 billion, attributed to decreases in volumes of gold, platinum, and vehicles. Meanwhile, imports saw a comparably modest decline of 9.0% m/m to R149.9 billion. Overall, the trade balance surplus amounted to R61.0 billion in 2023, significantly lower than the R192 billion surplus in 2022. This was influenced by strong import growth of 8.8% y/y, consistent with the ongoing renewable investment drive, while export growth remained muted at 1.3%.
On Friday, the Absa PMI for February will be published. In January, the PMI declined sharply, dropping below the 50-neutral mark to 43.6 points from 50.9 points in December 2023. The decline was primarily driven by a sharp drop in the business activity index, falling to 37.1 from 51.4. New sales orders decreased by 9.1 points to 37.2, and inventories dropped by 6.7 points to 37.7. The decrease in business activity occurred despite relatively subdued electricity load-shedding but reflected weak domestic and external demand.
Also on Friday, Naamsa will publish new vehicle sales data for February. In January, vehicle sales declined for a sixth consecutive month, recording -3.8% y/y, as passenger car sales slid deeper into contraction. Nevertheless, volume sales were still 3.2% higher compared December. The weak domestic sales reflect the lingering economic headwinds, including high cost-of-living, tight monetary policy conditions as well as energy and logistics infrastructure constraints.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 20 Feb | SA | Leading indicator | Dec | 111.0 | 111.8 |
| SA | Unemployment rate | 4Q23 | 32.1 | 31.9 | |
| 21 Feb | SA | CPI % y/y | Jan | 0.1 | 0.0 |
| SA | CPI % m/m | Jan | 5.3 | 5.1 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 29 Feb | SA | Private Sector Credit Extension % y/y | Jan | -- | 4.9 |
| SA | PPI % y/y | Jan | -- | 4.0 | |
| SA | Trade Balance RBn | Jan | -- | 14.1 | |
| 1 Mar | SA | New vehicle sales % y/y | Feb | -- | -3.8 |
| SA | Manufacturing PMI | Feb | -- | 43.6 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 74,112.74 | 1.2% | 1.1% | -5.2% |
| USD/ZAR | 19.16 | 1.1% | 0.6% | 5.1% |
| EUR/ZAR | 20.74 | 1.8% | 0.5% | 7.3% |
| GBP/ZAR | 24.26 | 1.6% | 0.4% | 10.4% |
| Platinum US$/oz | 899.26 | 0.1% | 0.8% | -5.2% |
| Gold US$/oz | 2,022.88 | 0.9% | -0.3% | 10.8% |
| Brent US$/oz | 83.61 | 0.9% | 5.1% | 3.7% |
| SA 10 year bond yield | 10.83 | -0.6% | 1.9% | 0.7% |
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 |
