Investors wary of SA’s weak fiscal outlook, logistics challenges

INVESTORS have warned of a weak fiscal outlook in South Africa (SA) due to expenditure containment pressures, the ongoing financial support for Eskom, and large transfers expected to keep Transnet afloat.

This comes as finance minister Enoch Godongwana prepares to table his February 2024 budget review in parliament amid a projected deficit of around R347 billion for the 2023/24 financial year, a substantial increase from the R247 billion deficit in 2022/23.

SA’s gross loan debt is projected at 74,7% of gross domestic product (GDP) for 2023/24, significantly up from 70,9% in 2022/23.

Bank of America (BofA) on Friday said budget 2024 was unlikely to offer much good news, but the fiscal outlook could finally turn the corner in 2026.

The bank noted that the budget framework has R15 billion in additional tax revenue in the baseline, likely thanks to bracket creep – less inflation adjustment on tax brackets.

However, BofA’s sub-Saharan Africa economist, Tatonga Rusike, said expenditure pressures remained on wage bill spending, social grant spending and higher transfers to weak state-owned enterprises.

Rusike said there would still be disappointments in the pace of expenditure containment, especially as the government was likely to provide new allocations to Transnet this year.

“The fiscal outlook remains largely weak on expenditure containment pressures, and Eskom support is still part of the fiscal framework until 2025. This year’s budget is coming up next month and is unlikely to contain much good news, beyond no new taxes,” he said.

“New allocations to Transnet are likely, while the social relief distress grant could be made permanent beyond next year. Near term marginal improvements in revenue collection and moderating expenditure growth will keep fiscal less bad.”

However, Godongwana last week said the national treasury was wary of pouring more money into Transnet, because hundreds of billions of rands had disappeared the same way down the Eskom drain, without any return on investment.

“The problem for me is to avoid the Eskom template of putting money in now and again without making sure there are efficiencies. We spent more time fixing Eskom without fixing power to the grid. Those are two distinct things.

“Now we must avoid fixing Transnet to the exclusion of fixing the logistics issues. The totality of these issues will inform whether we do the injection or not.”

Transnet has been a major economic growth constraint in the 2023/24 financial year due to logistics challenges emanating from the collapse of the rail network and the months-long backlog of container vessels at the Port of Durban.

Momentum Investments economist Sanisha Packirisamy says the escalating logistical challenges were affecting rail and port efficiency and dampening growth prospects in South Africa, even as energy constraints were expected to ease.

Packirisamy also says the country’s interest burden and social demands remained high, hindering a swift stabilisation in the country’s debt ratio, while spending reductions, tax increases and managing state-owned entity challenges will be critical.

“While load-shedding is expected to detract from SA’s economic growth, improvements in Eskom’s generation plan and increased private sector investment in renewable energy suggest a potential easing of the energy crisis,” he says.

“However, logistical challenges, particularly in rail and port inefficiencies, persist. Rail inefficiencies alone are estimated to cost around 5,5% of the GDP in 2023.

“Despite government initiatives to address logistics issues, including the implementation of the freight logistics roadmap, growth projections for 2024 and 2025 are likely to be constrained to 1% this year and 1,7% next year.” – IOL