(Bloomberg) -- South African Finance Minister Enoch Godongwana will deliver his first mid-term budget since a business-friendly coalition government took office in June, bolstering investor sentiment.
Investors will look to the former labor unionist for concrete steps on how the 10-party administration, which was formed after May 29 elections stripped the African National Congress of its parliamentary majority, will lower debt and reduce the fiscal deficits, amid an improved economic outlook.
Here’s what to watch for as Godongwana presents the revised fiscal framework for the next three years in Cape Town on Wednesday.
Better Prospects
After years of weak growth, economists expect National Treasury to revise its forecasts for the next two years upwards, largely because of improved power supply.
The country has had an uninterrupted power supply for seven months, following years of rolling blackouts. They also foresee the economy benefiting from a pick up in consumer spending because of lower interest rates and reforms that allow individuals early access to part of their retirement savings.
The growth forecast is likely to be lifted to 1.8% next year and 2% in 2026, compared with Treasury’s February estimates of 1.6% and 1.8%, according to the median estimate of 15 economists polled by Bloomberg.
Fiscal Consolidation
The nation’s debt trajectory is seen improving after the National Treasury tapped the country’s contingency reserves.
The 100 billion rand ($5.6 billion) drawdown has helped stabilize the “fiscal position in the context of fiscal consolidation,” said Investec Bank Ltd. Treasury Economist Tertia Jacobs. “We’re not over the camel’s back yet,” she said. “We’re still climbing the hill.”
The ratio of debt to gross domestic product is expected to peak in 2025-26 and the consolidated budget deficit is likely to reach 4.5% of GDP in the year through March 2025 — in line with the Treasury’s targets, the median estimate of economists in a Bloomberg survey show.
Infrastructure Boost
While the Treasury is expected to hold the line on new bailouts for struggling state firms such as port and rail operator Transnet SOC Ltd., which will help with its debt consolidation plans, it is set to provide more details on proposals to raise private-sector investment in infrastructure — including a new credit-guarantee facility.
The Treasury is unlikely to concede to an equity injection for Transnet and is more likely to explore blended financing models, said Miyelani Maluleke, senior economist at Absa Corporate and Investment Banking.
If it were to do so “we believe it would prefer to provide its support in tranches, contingent on Transnet making sufficient progress with its turnaround reforms,” he said.
Wage Bill
Larger-than-budgeted salary increases for public service workers could cloud the fiscal outlook.
Civil servant unions are demanding a 7.5% raise for the fiscal year ending March 2026, while the government is offering 4.7%, up from an initial 3%.
A higher wage bill would increase Treasury’s consolidated budget deficit, Nedbank Group Economic Unit said in a research note.
Inflation Target
The central bank and the Treasury are currently working on a framework to introduce a new inflation target to guide monetary policy decision-making, and Godongwana may hint on progress made so far.
Reserve Bank Governor Lesetja Kganyago has repeatedly said the current 3% to 6% target band, which has been in place since 2000, is outdated and needs to be reviewed. He’s argued that adjusting the target will give South Africa the chance to permanently lower inflation and interest rates, placing the country in a better position to compete with its peers.
Jee-A van der Linde, senior economist at Oxford Economics, said the moment is opportune to revise the target.
“It is a correct approach to aim for lower inflation,” Van de Linde said, while warning that fiscal policy will have to catch up, and high administered prices addressed.
Administered Prices
Godongwana may announce steps to reduce administered prices, such as fuel levies that contribute to higher inflation. He may also shed light on plans to increase the list of goods that won’t incur value-added tax to address the rising cost of living.
“Treasury is working on those, especially in terms of the administered fuel prices,” Chris Axelson, the Treasury’s acting head of tax and financial sector policy, told lawmakers last week. “We are liaising with other departments in terms of the administered fuel as well as considering the tax impact on fuel prices and we are also doing research into potentially expanding the zero-rated basket.”
--With assistance from Dana Morgan and Paul Vecchiatto.
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