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Arthur Kamp

Investment Economist at Sanlam Investments

Projections for the medium term outlined in Finance Minister Enoch Godongwana’s debut Medium-Term Budget Policy Statement (MTBPS) on Thursday were met with approval by financial markets. However, the underlying debt dynamics remain a cause for concern. In our view, the Minister’s emphasis on increasing capital expenditure, while constraining government consumption amid measures such as restructuring state-owned companies, is spot on. The key question – crucial for debt stabilisation – is how and to what extent these measures can be implemented.

Broadly, the Mini Budget projections for the medium term were in line with prior expectations. The restrained expenditure framework clearly shows National Treasury’s intent to hold the line on fiscal discipline.

Also, this year’s revenue projection is R120.3 billion higher than initially expected in February 2021, due to the favourable impact of high export commodity prices on income. As a result, the Main Budget deficit narrows to -6.6% of gross domestic product (GDP) in 2021/22 from -9.9% of GDP in 2020/21. Over the medium term, the Main Budget deficit decreases further to -4.9% of GDP in 2024/25. At the same time, the primary budget deficit improves from a deficit of -2.3% of GDP in 2021/22 to a small surplus of +0.2% of GDP in 2024/25.

However, the key question is whether the assumptions underpinning the medium-term outlook are likely to pan out. National Treasury’s GDP growth projections and tax buoyancy assumptions are reasonable, with real GDP growth projected below 2% from next year, while some moderation in commodity prices is expected.

Execution risk, however, lies in the expenditure projections. Given the better-than-expected revenue performance, Treasury increased total Main Budget non-interest expenditure by R31.9 billion in 2022/23 and by R29.6 billion in 2023/24 following an upward adjustment to 2021/22 non-interest expenditure of a net R59.4 billion. This reflects additional spending of R77.3 billion, of which the main components were the wage bill adjustment of R20.5 billion and the R32.9 billion increase in spending following the July 2021 protests, partially offset by underspending elsewhere and a drawdown on the contingency reserve.


But here’s the thing. Non-interest spending is projected to fall to 23.5% of GDP by 2024/25, from 26.3% of GDP in 2021/22, with the focus on the wage bill. Consolidated government wages are projected to fall by -0.1% in 2022/23 and by -1.4% in 2023/24, before increasing by 4.4% in 2024/25 in current prices. This implies government workers’ real wages are set for a material downward adjustment over the next two years. Absent a finalised wage deal, this clearly holds significant risk to the expenditure and overall fiscal outlook.

Further expenditure on social grants declines in absolute terms from R221.7 billion in 2021/22 to R215.3 billion in 2024/25. The Minister noted spending is focused on service delivery and is ‘highly redistributive’. Still, the current unemployment rate of 34% suggests this will also be difficult to implement. It appears Treasury favours spending on employment creation (R74 billion will be included for this in the 2022 budget to be spent over the medium-term framework period) in lieu of grants spending. However, this may not preclude possible upward adjustments to grant support as the debate around this unfolds.

At least, given the revenue bonanza, the gross loan-debt ratio dips to 69.9% of GDP at end March 2022 from 70.7% of GDP at end March 2021. Looking further ahead, Treasury expects the gross loan-debt ratio to stabilise at 78.1% of GDP in 2025/26, before gradually declining thereafter. Debt stabilisation is ‘back-ended’, though.


There are a myriad of assumptions underpinning the projected path of the fiscal ratios. It is, nonetheless, clear that the underlying debt dynamics (i.e., the interplay between interest rates, economic growth and the primary budget balance) are not favourable, implying that the debt ratio climbs persistently over time. We expect interest payments on government debt to increase to 21% of Main Budget revenue by 2024/25 from 18% of revenue in 2021/22. This crowds out expenditure elsewhere.

Varying assumptions as regards GDP growth or commodity prices change the slope of the expected debt trajectory, but the debt ratio is still expected to climb over the next three years.

Moreover, beyond the medium term, we are not privy to the factors or assumptions that are expected to lower the debt ratio as projected by Treasury. Our own trend assumptions do not lead to debt stabilisation over this period. We think something fundamental must change, that is, real GDP growth must lift to stabilise government debt (or more spending cuts and a larger adjustment to the primary budget balance are needed).


To this end, Minister Godongwana’s emphasis on increasing capital expenditure, while constraining government consumption, amid other measures, including restructuring of state-owned companies, is spot on. However, implementation is the key issue.

At the same time, the gross borrowing requirement increases from R475.1 billion in 2021/22 to R493.3 billion in 2022/23, including an increase in redemptions to R113 billion next year from R65.2 billion this year.

Total domestic long-term loan issuance in 2021/22 amounts to a revised expectation of R285.3 billion (sharply lower than the R380 billion previously expected), while R77.6 billion in foreign loans is also pencilled in (significantly larger than the R46.3 billion projected in February 2021).

However, funding through domestic long-term loans jumps to R381.8 billion in 2022/23, while foreign funding declines to R47.0 billion. In the absence of sustained significant foreign capital inflows, too much government borrowing constrains private sector credit and investment, which in turn restricts GDP growth.

Finally, Treasury has indicated it intends to run its cash balances down by R112.2 billion in the current fiscal year to assist with funding. This is in line with the R112.6 billion initial projection published in February 2021. Projected use of cash balances next year is minimal. This begs the question as to whether Treasury will continue to run a large cash balance, or whether part of the cash balance will be employed for another purpose (although we should bear in mind cash balances at the South African Reserve Bank seem likely to be maintained, while some cash is also required for operational purposes).

Commentary by Alwyn van der Merwe, Director of Investments:

Investors generally don’t want surprises when politicians deliver policy statements or, in this case, provide broad guidance in terms of the planned fiscal route for the country. While we didn’t get many surprises in the projected fiscal numbers for the next three years, concerns about the growing debt ratio remain despite the reassurance of government’s commitment to fiscal consolidation via expenditure restraint combined with structural reforms to lift trend growth and, in turn, fiscal revenues.

The response of local financial markets to Minister Godongwana’s MTBPS was muted. The rand strengthened marginally, 10-year bond yields tracked sideways, and the local equity market tried to digest fresh global inflation numbers rather than focusing on the speech.

The key fiscal ratios look materially better compared to those projected in February, but it was quite clear in advance that the revenue windfall and the upward adjustment of the local GDP – simply put, the size of the economy – would lead to better numbers. Arthur’s summary above reflects this.

This path to a small surplus in 2024/25 should address the fears of those who were concerned about government’s intentions of restoring fiscal sustainability. However, there are many assumptions underlying these fiscal ratios, including the debt-to-GDP ratio. Some of these assumptions rely heavily on the execution of discipline on the expenditure side. It remains to be seen whether government can stick to its expenditure profile while addressing the social challenges our country faces.

A final observation: the overrun in revenue and projected fiscal constraint would have relieved the potential pressure on new issuance in the bond market. Longer-term domestic bond issuance for FY21/22 was reduced from R380 billion to R285 billion. Authorities have raised R180 billion in domestic long-term loans in FY21/22 (in cash terms). Treasury is on track to issue ~R280 billion in FY21/22 at the current pace, marginally below its R285 billion forecast.

We expect the pace of weekly issuance to be unchanged for the rest of FY21/22, although there is a small risk for a marginal increase in order to meet the full-year projections. The authorities have raised their projection for foreign issuance, with US$5.3 billion now seen (up from US$3.1 billion). Of this, US$3 billion is projected to come from capital markets, with the remaining US$2.3 billion coming from multilateral institutions.

In conclusion, the projections on paper were clearly met with approval by financial markets. However, the lingering uncertainty will remain as the fiscus will need to strike the right balance between growth initiatives, addressing social and political requirements, and achieving its objectives in terms of fiscal consolidation.

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