#MTBPS predictions: A cautious optimism signals new phase of stability and growth
On the eve of the Medium-Term Budget Policy Statement (MTBPS), there is a cautious optimism about the country's economic trajectory.
Source: © 123rf 123rf there is cautious optimism on the country's economic trajectory on the eve of the MTBPS
This year the MTBPS comes amidst decreasing inflation, which is still high, but gradually lower interest rates, a strengthened rand and other recent shifts in fiscal strategy, driven by ongoing reforms and an improved political landscape, signal that we are edging closer to a new phase of stability and growth.
This is the first MTBPS presented by the new Government of National Unity (GNU) and will offer a glimpse into how 2025's Budget Speech will likely look.
Youth employment expert, Momentum Group’s head of youth employment Nkosinathi Mahlangu anticipates that once again, the MTBPS will be a balancing act for the treasury.
A wealth manager at Consult by Momentum, Jurgen Eckmann is interested in Budget deficit and public debt and hopes to see improvement in these areas.
For Johann Els, group chief economist at Old Mutual, the MTBPS is expected to showcase continued fiscal consolidation efforts and policy reforms aimed at narrowing the budget deficit and stabilising the debt ratio over the coming years.
Balancing act
Mahlangu anticipates the minister will reiterate government’s focus on fiscal consolidation and strictly managing expenditure - no huge departure from the mini-budgets of previous years.
However, this time around, it will also act as 'proof of concept' for the Government of National Unity (GNU); an audition where the newly-formed government needs to demonstrate that it has the finger on the pulse of SA's economic pain points, which includes unemployment.
Budget deficit
The National Treasury projects a budget deficit of 4.9% of GDP for 2023/2024, which is lower than the 5.3% median forecast from local economists.
The debt is expected to peak at 77.7% of GDP in 2025/2026, which is higher than the 73.6% target set in Budget 2023.
Els predicts the primary budget balance will reach a slightly bigger surplus this year – compared to previous estimates, a significant milestone that Treasury expects will continue to strengthen in the medium term.
This progress is attributed to improved revenue performance and disciplined expenditure control, which are likely to reduce the fiscal deficit to around 4.3% of GDP, down from earlier projections of 4.5%.
Els emphasises that South Africa’s fiscal position is steadily improving.
“The budget deficit is expected to narrow further from last year’s figures, with the outcome this year tracking better than February’s estimates,” he notes.
Eckmann adds, “I hope to see this figure decline steadily in the years to come as the government employs new fiscal activities to stimulate economic growth.”
Debt-service costs
One of the primary themes in this MTBPS will be South Africa’s path to a more sustainable debt ratio.
While Treasury’s projections currently place the debt-to-GDP ratio peaking at 75.3% in 2025, this is far below previous forecasts by major credit agencies like Moody’s and Fitch, which anticipated the debt ratio would exceed 90% by this period.
Debt-service costs as a share of revenue are expected to increase from 20.7% in 2023/2024 to 22.1% in 2026/2027.
“I hope to see the tailwind of a lower interest rate environment reducing this burden on the economy over the next two years,” says Eckmann.
“These improvements indicate a stabilising debt trajectory, which we hope will prompt rating agencies to adjust their outlook on South Africa from ‘stable’ to ‘positive’ within the next six to twelve months,” says Els.
He further suggests that while an actual credit upgrade may take another year or two, South Africa’s improved fiscal position could lead the way back to an investment-grade rating in the medium term.
In addition to debt management, Treasury’s goal of building primary budget surpluses is firmly on track, according to Els.
This strategy is crucial in creating a foundation for lower debt issuance shortly, a shift that will alleviate some of the pressures on national debt servicing costs.
“Every one percentage point reduction in interest rates lowers interest costs by approximately R7–R8bn and reduces debt by R12–R14bn,” he explains, highlighting the compounded benefits of reducing the deficit and controlling debt issuance.
Inflation
As for inflation, while the MTBPS may make a nod towards an inflation target adjustment, Els believes it’s unlikely that a new target will be introduced in the near term.
Lower inflation and interest rates are anticipated to further stabilise the Rand, which has shown signs of strengthening.
“A stronger rand, coupled with ongoing load-shedding improvements and better inflation control, will boost confidence among businesses and consumers, supporting economic growth over the medium term,” he states.
Two-pot - economic stimulus?
Looking at the broader macroeconomic outlook, improved growth expectations have boosted Treasury’s revenue projections.
Although revenue remains slightly behind target for the first five months of the fiscal year, Els expects collections to pick up in the remaining months as growth gains momentum.
Proceeds from 2-pot pension withdrawals – not included in the February budget’s tax estimates – will also help.
This uptick is anticipated to further bolster the budget deficit targets and continue enhancing South Africa’s fiscal position.
Eckmann would also like to see a mention of how two-pot savings withdrawals have filtered into the economy to bolster growth and how this injection in tax revenue will be directed in the MTBPS.
Social Relief of Distress (SRD) Grant
There is also anticipation around the MTBPS's potential announcements on social spending and state-owned enterprise (SOE) support.
With unemployment still sky-high, Mahlangu says the Social Relief of Distress (SRD) Grant is an important political pillar for the ANC, so we can expect the social relief grant to continue for the foreseeable future.
Eckmann agrees and sees the R350 SRD grant will continue until March 2025.
The government will also review the social grant system to create a new social security policy and funding model.
“ I want to get more clarity on the sustainability of funding and how this can be reorganised to stimulate economic growth at the same time as providing necessities.”
Els notes that significant SOE interventions such as for Transnet might be deferred to the main budget in February 2025.
Any potential SOE support will be conditional, reinforcing Treasury’s “tough love” approach to fiscal support, aimed at fostering operational reforms within these entities.
Job creation
When it comes to job creation, Mahlangu says government typically speaks about various infrastructure programmes and manufacturing to boost job creation.
This year, we expect agriculture to have increased focus, given Minister Steenhuisen's recent announcements around his department's moves to support small-scale farmers, helping them grow.
SMMEs red tape
What Mahlangu is really hoping for is that this year's mini-budget outlines measures to reduce the red tape for SMMEs, increasing access to funding and small business support.
"Given the recent furore around spaza shops owned by foreign nationals, we might also see the informal economy get a mention," he adds.
What could ruin this increasing optimism are rising geopolitical tensions, especially if oil prices increase, while lower global demand could weaken commodity prices and negatively impact government revenues.
