‍Citadel’s Chief Economist predicts the medium-term budget speech on 30 October will bring some welcome good news about economic growth thanks to improved political and energy stability - but he warns that over-spending on the public sector wage bill remains the elephant in the room for the local economy.

Good news about long-awaited economic growth could come through for South Africa in the upcoming Medium-Term Budget Policy Statement (MTBPS), according to Citadel Chief Economist Maarten Ackerman.

South Africa’s Finance Minister, Enoch Godongwana, will deliver the MTBPS on Wednesday 30 October, and Ackerman predicts that improved political and energy stability could usher in some good news for weary South African consumers.

SOUTH AFRICA TICKS SOME BOXES FOR ECONOMIC GROWTH

“Compared to the February budget, I do think that there is room for higher growth estimates, thanks to improved political stability following the formation of the new Government of National Unity (GNU) as well as greater electricity production and less load shedding, and the recent interest rate cuts, which should bring some consumer relief. We’re also happy to see some investment spending taking place to address the country’s infrastructure issues.”

Another factor that could have stimulated more economic growth since the elections is the emergence of a “more business-focused GNU”. “As a result of that the government is now in a position not only to focus on the populist checklist but to stick to fiscal austerity and get growth on track and the economy going”.

Ackerman and his team foresee economic growth rising to 1.5% plus over the next year, compared to gross domestic product (GDP) growth of 1.9% in 2022 which decelerated to 0.6% in 2023, due to ongoing electricity shortages, transport sector woes and lower international earnings on gold and platinum group metals.

“If the economy strengthens, it implies that tax revenue can also increase. One however needs to consider that in the year to date, revenue collection came under pressure and the South African Revenue Service (SARS) did not collect as much as Treasury had budgeted for in February. Lower revenue is one piece of potential negative news we can expect to come out of the medium-term budget.”

THE IMPACT OF GFECRA ON SOUTH AFRICA’S ECONOMIC HEALTH

Ackerman says the R100 billion worth of gold and foreign exchange reserves that came into the South African monetary system, because of the monetisation of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) in February, took away some of Treasury’s funding pressures, but this windfall would not last much longer.

“Once this injection dries up, we will have to rein in once again on the expense side, particularly in terms of cuts in government spending on items such as the public sector wage bill.”

Ackerman explains that a stronger rand reduces the GFECRA account and the government’s “ability to keep on tapping into that account”. “If we look at the limited boost, we can get from GFECRA and other factors, the elephant in the room is still the wage bill, which is always a significant part of the budget.”

Public servants recently asked for a 12% pay increase, which the government countered with a 3% offer. “It is one of the crucial factors that one needs to address in the budget going forward if we are to consider or be able to get any rating upgrade from any of the rating agencies,” Ackerman says, referring to South Africa’s sovereign credit rating.

CONCLUSION

“The bottom line is if our new Government of National Unity can deliver higher economic growth that will result in higher revenue collection, that will be a great start in terms of changing the income mix of government. If we can also keep the wage bill intact and minimise wasteful spending and achieve more balanced spending between what's important for business versus the populist agenda, we can start making slow progress towards a more sustainable deficit and debt dynamics going forward.”