By: Mzimasi Mabece
In the next coming weeks, all eyes will be on the upcoming 2025 Budget speech considering the direct and indirect impact it has on investors and companies alike.
South Africa’s economic climate has changed significantly since the October medium-term budget policy statement. Then, South Africa’s currency and asset prices were basking in the euphoria and optimism that followed the formation of the Government of National Unity (GNU), the dissipation of country-specific political risk, and the rand was trading at R17,60/$ as opposed to R18,79/$ in May 2024. Business confidence had also been bolstered by uninterrupted electricity supply and consumers experiencing financial reprieve with a below 3,0% Inflation rate. SARB has, over the last year and to date, cut interest rates by a cumulative 75 basis points.
Given all of this, we expect Finance Minister Enoch Godongwana to be consistent and to expand on the themes he highlighted in the MTBPS when he delivers the budget speech in just over a month. Something which investors and businesses will welcome, and which ratings agencies will look upon favourably later in the year.
We don’t expect increases in personal income tax, VAT, and company tax rates. Income tax brackets, just like in last year’s budget, may not be adjusted for inflation to allow bracket creep, especially for taxpayers in the higher tax brackets. Tax on sugar, carbon, tobacco, and alcoholic beverages will be adjusted upwards as has become the norm.
SARS efficiency and the introduction of the two-pot retirement system point to the Minister announcing improved revenue collection projections compared to the last national budget. There could be an
increase in the allocation to SARS to enhance the revenue collecting agent’s efficiency through data science and artificial intelligence to increase its focus on areas presenting compliance risk.
We anticipate Minister Godongwana will reaffirm the government’s commitment to fiscal consolidation and spending cuts and may announce cost reduction proposals including pegging public sector wage increases to inflation. However, this will be challenging given how contentious salary negotiations have proven to be in the past.
A point of much contention, the National Health Insurance Act could well receive its first budget allocation now that it is promulgated into law. This may be as high as 1,0% of the national health budget. However, all indications are that it will take years before NHI is fully implemented.
Operation Vulindlela, a government-wide initiative set up to drive reform has seen some success. Phase 2 will shift focus to local government reform and critical infrastructure investment with the aim of improving the delivery of basic services and harnessing digital public infrastructure as a driver of growth. It will also target the energy, water, logistics, and infrastructure sectors.
It will be interesting to see how the Minister intends to fund this phase as large infrastructure projects will need fiscal support to be realised. This may take the form of ring-fenced allocation to municipalities with capacity, for these specific infrastructural projects.
The Minister may also announce sector-specific regulations governing Public Private Partnership protocols to advance these projects.
At the time of the MTBPS, the Minister told us that “the budget facility for infrastructure is being reconfigured into a centralised gateway for all large infrastructure projects that require fiscal support to advance.” He also indicated that the government was “making a concerted effort to increase the pool of funders to diversify public infrastructure financing through new mechanisms and instruments”.
Defaulting municipalities remain a drain on the fiscus. We expect to see support for distressed municipalities in the form of debt relief to improve governance, and their financial health, and to attract and retain the required skills.
The same can’t be said for state-owned entities such as Transnet and Eskom who we don’t believe will receive bailouts except for contingency allowances.
In September, the National Treasury issued two new nominal bonds, with 8- and 14-years respective maturities. We do not expect further funding announcements and there may even be a reduction in bond issuances. These bonds are likely to be included in the All-Bond Index this year which will reduce the weighted duration and yield to maturity of the index.
Despite the recent weakness in the domestic currency and local bonds, these are still stronger than when last year’s national budget was delivered. The Minister is expected to leave the fiscal metrics forecasts similar to those in the medium-term budget. We believe this will allow a positive fiscal runway should the local currency and bond yields remain resilient while the uncertainties and risks play out.
Finally, the current inflation target ranges between 3% and 6%, however, the Reserve Bank believes it should be narrowed to focus on a specific target. While inflation is expected to rise in 2025 it is likely to stay below 4.5% on average. The Minister may use the upcoming budget to share plans for lowering the inflation target and introducing a more precise goal.
Overall, we expect the Minister to deliver a healthier prognosis of government finances given the improved environment and the economy expected to grow by almost 2% in 2025.
However, growth will continue to be held back given the logistics and infrastructural backlogs, proposed electricity tariffs, financial market volatility as US policies under Donald Trump unfold, and lackluster consumption demand from China. Improved electricity supply and a positive political backdrop should help with the restoration of business and investor confidence.
The MTBPS, despite its cautious slant, was well received by rating agencies, and as a result, S&P revised its sovereign rating outlook from stable to positive. If the Minister, in the coming budget, maintains this fiscal trajectory, South Africa may not be too far from a sovereign rating upgrade.
* Mabece is the head of fixed income at Melville Douglas, the boutique fund manager for the Standard Bank Group.
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