South Africa’s Godongwana Faces Policy Tightrope in First Budget

Investors will look to Godongwana for concrete plans to rein in debt and reduce anticipated budget shortfalls.

What Bloomberg’s Economist Says…
“Both the South African government and the market are likely to celebrate lower debt and deficit figures when new Finance Minister Enoch Godongwana tables the medium-term budget policy statement on Nov. 11. We remain skeptical. The rebased data will no doubt lower the country’s debt as a share of GDP, but it shouldn’t change the direction of travel as the underlying fundamentals haven’t changed.”– Boingotlo Gasealahwe, Africa Economist 

Since his Aug. 5 appointment, the former labor unionist and head of economic transformation in the ruling African National Congress has pledged policy continuity. He’s expected to stick to predecessor Tito Mboweni’s fiscal consolidation plans and focus on “growth-stimulatory measures, with a move away from accelerating current expenditure,” according to Annabel Bishop, chief economist at Investec Bank Ltd. 

His resolve may be tested by the ANC’s worst electoral performance last week since the end of White-minority rule in 1994. Opposition to austerity measures from factions within the party could intensify and lead it to promise more social support before national elections in 2024, said Lumkile Mondi, a senior economics lecturer at the University of the Witwatersrand. 

A monthly welfare payment of 350 rand ($23) that was reintroduced in the wake of deadly riots, looting and arson in July is set to end in March. Civil-society groups have proposed the introduction of a basic income grant that business organizations say is unaffordable. The budget may show President Cyril Ramaphosa’s current thinking on social support.   

“If a more permanent expansion of the grant system is introduced, it is likely that a more permanent revenue stream may have to be considered to limit the drag on the fiscus,” Momentum Investments analysts Herman van Papendorpand Sanisha Packirisamy said in a note. The Treasury in February scrapped plans to raise taxes and announced proposals to lower the corporate tax rateto 27% from April. 

The Treasury this year shifted focus to make a primary budget surplus, instead of a spending ceiling, its most critical fiscal anchor. Two-thirds of economists in a Bloomberg survey, however, don’t expect the government to meet its target of reaching that by 2025. A primary surplus, which excludes interest costs, would suggest the state can extract the necessary resources from the economy to service debt, the fastest growing expenditure line item since 2011.Significant welfare commitments, combined with the risk that civil-servant pay deals may exceed the amount budgeted and more bailouts for state-owned companies will compromise plans to bring spending in line with revenue.

Source: Bloomberg Business News