By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano.
Key highlights
Economic growth
Treasury's economic growth projections closely align with ours (see figure 1), indicating that growth bottomed out at 0.6% in 2023 due to severe challenges such as load-shedding, port and rail inefficiencies, and cost-of-living pressures. Growth is anticipated to recover to 1.3% this year, with gradual improvements to 1.6% and 1.8% in 2025 and 2026, respectively. This positive trajectory is supported by expectations of reduced load-shedding intensity and alleviated of cost-of-living pressures. Headline inflation is forecast to decline to 4.9% in 2024, stabilising at 4.6% in 2025 and 2026. Meanwhile, the current account deficit is estimated to have widened to 1.8% of GDP last year, with projections to further increase to 2.8% this year and 3.0% in 2025 and 2026. This trend is indicative of a less favourable global environment and domestic challenges in ports and rail infrastructure, which are expected to constrain export volumes.
As part of lifting potential growth through boosting capital investment, government is implementing reforms to reduce waste and inefficiency, improve quality and increase the impact of public investment on growth. Within a public-private partnership framework, an infrastructure finance and implementation support agency will be established in 2024/25 to coordinate the planning and preparation of large infrastructure projects, engaging directly with private financial institutions.
Tax revenue: Performance and proposals
As projected in the MTBPS, gross tax revenue is underperforming by R56.1 billion in 2023/24 compared to 2023 Budget projections. This reflects significant revenue underrun in corporate income tax amid reduced corporate profitability and the impact of cost-of-living crisis on value-added tax revenue collections. The main budget revenue is expected to be lower by R46.4 billion in 2023/24, with the underrun extending in 2024/25 and 2026/25. To alleviate fiscal pressures, and as indicated in the MTBPS, Treasury is proposing a net revenue increase of R15.0 billion in 2024/25, R15.9 billion in 2025/26 and R24.6 billion in 2026/27 through the following tax policy measures (see Figure 2):
These proposed revenue increases are partially offset by the following policy support measures:
Additionally, the government is set to implement the two-pot retirement reform in 2024/25. Under this reform, retirement funds will be divided into one-third for the savings component and two-thirds for the retirement component, effective from 1 September 2024. This initiative grants individuals pre-retirement access to their pension funds and is expected to generate approximately R5 billion in tax revenue in 2024/25.
Non-interest expenditure
Expenditure pressures related to social spending and the wage bill are evident, and over R250 billion has been set aside for meeting the 2023/24 wage bill increase and supporting additional spending in labour-intensive departments. In addition, the Social Relief of Distress (SRD) grant has been extended for another year and further spending has been allocated to enhancing crime-fighting and social protection capabilities. Nevertheless, baseline reductions and a drawdown on the unallocated reserve have resulted in a net R6 billion decline in non-interest expenditure in 2023/24, with net reductions of R80.6 billion over the 2024 Medium-Term Expenditure Framework (MTEF).
Fiscal ratios
Compared to the 2023 Budget, the main budget deficit is expected to be wider at 4.7% of GDP in 2023/24 before gradually narrowing to 3.4% by 2026/27 as the primary balance surplus (i.e., revenue minus non-interest expenditure) increases from an estimated 0.4% of GDP in 2023/24 to 1.8% of GDP in 2026/27. Although debt service cost pressures prevail, payment is expected to be lower by around R30.1 billion over the 2024 MTEF relative to the MTBPS, underpinned by the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) transfers of R100 billion in 2024/25, R25 billion in 2025/26, and R25 billion in 2026/27 that will help reduce the gross borrowing requirement.
Effectively, the fiscal framework is anchored on lifting the primary surplus, which together with the GFECRA transfers, helps with a downward parallel shift in the gross debt-to-GDP ratio curve. As a result, gross debt is now peaking lower at 75.3% of GDP in 2025/26 compared to a projected peak of 77.7% at the MTBPS. Nominal GDP growth is expected to increase by 6.1% over the MTEF, slightly lower than the 6.2% growth forecast at the MTBPS. Therefore, there is risk in the projected debt trajectory in the absence of strong nominal GDP growth, however, after public consultations, government plans on implementing a binding fiscal anchor which will help with long-term fiscal sustainability.
Economic implications
The 2024 Budget may be negative for growth, from a cyclical phenomenon in that it proposes raising revenues, through bracket creep as opposed to tax base expansion, which will put pressure on already overburdened households. However, this will likely be counteracted by moderating inflation, the contemplated, albeit shallow, interest rate cutting cycle, and a R7.4 billion allocation for the Presidential Youth Employment Initiative. Over the medium term, the fiscal strategy is clearly focused on stabilising public finances, which should help reduce the cost of borrowing for government and corporates - ultimately enabling investment and growth. The ongoing reforms within energy, port and rail network industries, and the establishment of the Infrastructure Finance and Implementation Support Agency to boost capital investment will be critical for lifting potential growth and employment creation. A projected R943.8 billion in public-sector infrastructure spending over the 2024 MTEF, the bulk of which is for investment spending by state-owned companies, should improve service delivery and underpin potential growth.
Market implications
The budget was decent from a market perspective - decidedly bond friendly and on balance more equity friendly than what we expected prior to its tabling. During the speech, the rand strengthened sharply, and bond yields came down across the curve. The equity market picked up from intra-day lows. The Financials 15 index along with the Mid-cap index (which are good proxies for SA Inc.) moved up meaningfully.
For bonds: Debt service cost continues to remain significant but will decline compared to projections in the 2023 MTBPS due mainly to a planned R150 billion in transfers from the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), which has resulted in the projected peak in government debt to reduce by 2.4ppts relative to the MTBPS to 75.3% of GDP in 2025/26. There is still a commitment to fiscal consolidation and a concerted effort is being made to stabilise debt. Lower debt or a requirement to raise less debt, as well as lower borrowing costs is regarded as bond positive.
For equities: It was a "push-and-pull" when it came to equity market impacts. Some of the more specific impacts on SA equities include:
Despite this being another surprisingly market-friendly budget, execution risk remains both on sticking to the budget and government executing vital reforms to ensure an uplift in growth longer term. This will ultimately support (or detract from) market performance over time.
