Macro Pulse Episode 29

Hello and welcome to Macro Pulse. The budget delivered yesterday by the finance minister, Godongwana, was somewhat on the conservative side and the debt metrics probably a bit softer than many economists had expected. Heading into the budget, expectations were quite high, but it was really conservatism around the revenue numbers that kept the numbers—the debt numbers—potentially lower than many economists expected.

Markets, however, responded well. The bond market, the equity market, as well as the rand strengthened. Equity markets benefited because of the outlook for tax relief for households; government decided—the National Treasury decided—to scrap their proposed 20 billion tax hike for this coming fiscal year, and personal income taxes has been adjusted for inflation, meaning that workers won’t creep into higher tax brackets. Also on the bond market side, we heard an announcement that the issuance—debt issuance—of weekly bond auctions would be reduced by 450 million rands. On the fixed income side, therefore, we saw bond yields falling and markets celebrating on that news.

But let’s think about South Africa South Africa is a net importer of energy and its energy import bill is around 5% of GDP That is less than that of India but higher than that of Brazil And while South Africa imports most of its energy demand 25% of the liquid fuel demand is supplied by Sassol through its coal to fuel technology Now this acts as a important buffer to fuel shortages So our economy is actually more driven by coal as SSA remains one of the most intensive uses of coal globally and coal makes out about 2/3 of our total primary energy But like many emerging markets fuel makes out a large portion of the consumer basket and around 4% of South Africans consumer basket is directly exposed to fuel prices If you include the indirect exposure so via food goods and energy that rises to about 12 to 15% of the consumer basket that is exposed directly and indirectly to the higher fuel price So the economy is fairly dependent on fuel and specifically on diesel as it relates to activities in the agricultural sector also transport and electricity generation So earlier this month the government um has pushed up the price of both petrol by about three rands and diesel by about 7 1/2 rand that is even after they’ve announced a cut in the fuel levy of about three rands per liter In the short term this fiscal cost can be absorbed Um we saw in the latest budget numbers by national treasury that the revenue overrun for this year relative to the budget in February is going to be 3 billion and there’s also a 5 billion contingency reserve in the 26 27 budget that can be used to pay for some of this buffer But you can see that this fiscal buffer can only last for so long perhaps two to three months at most before it really starts to um impact the fiscal cost What other countries have done around the world is that they have told people to start to work from home They have also increased subsidies In many cases they’ve even asked shops to close earlier um and for less movement We haven’t seen that in South Africa yet But that is what has happened amongst many emerging markets to ensure that people use less fuel and less energy.

More broadly, however, we believe the budget signals two things: one, that the GNU continue to function. Remember a year ago in 2025, we had political disruption heading into the budget that actually led to the budget being delayed. This time around, I think this signals that the GNU is functioning well, and it bodes well for the local government elections in that the GNU may potentially be persist and survive beyond local government elections later this year. Also, fiscal consolidation remains a priority as the debt-to-GDP ratio is now expected to peak at 78.9%—so 1% higher than the prior estimate, but still expecting to peak this year and then falling to around 70% during the next 8 years.

So, a very gradual consolidation. The primary surplus, which is a key input into this debt stabilization, is expected to be 0.9% this year—so unchanged—but then improves to about 2.3% over the next 3 years. The budget deficit is expected to narrow from 4.8% to 4.5% this year, 4% next year, and then around 3.1% over a 3-year time horizon. These numbers are slightly wider than the MTBPS estimates, but it still points towards fiscal consolidation.

On the expenditure side, we see fiscal or spending discipline being maintained in that the public sector wages will be growing at about 5%, now will slow to 3.3% in the next 3 years. While some of that saving will go towards capital spend; capital spend is now the fastest-growing component within the budget and it will be growing at 9.7% for the next 3 years. This is a clear signal of urgency and intent to restore and improve the country’s infrastructure.

On the revenue side, we saw assertive consumptions. Yes, revenue for the past financial year has come through higher than expected by about 30 billion rands. But looking forward, revenues have been trimmed mainly because that 20 billion tax hike that was proposed for this year has been scrapped, and the personal income tax brackets that has been adjusted for inflation; but also because the assumptions for corporate income taxes we believe remains conservative. National Treasury did increase the assumptions about commodity prices, but they did not increase the assumptions about the corporate income tax taken from the mines, and we believe there is potentially scope for upward surprise going forward.

Other notable developments within the budget is that National Treasury will continue to focus on a fiscal anchor, and in particular a principle-based fiscal anchor—one that we may get an announcement about later this year. Market may be slightly disappointing in that it’s not a numerical fiscal anchor, but it still points towards credibility for the future. Secondly, the 20% online gambling tax is still in its formation and consultation phase and we may get news about that only in the medium-term budget later this year.

And then thirdly, I think it’s interesting to see that the lower inflation target—the 3% inflation target—is starting to have an impact on overall debt cost, in that National Treasury has stripped their debt cost by about 10 billion rands as a result of funding cost that has dropped over the last year. How will rating agencies perceive this budget? Well, we’ve heard from Moody’s; they remain skeptical about the path of our debt-to-GDP ratio and see that ratio remaining above 80% for the foreseeable future. And so we think going forward, this provides scope for upward surprise not only for Moody’s but also other rating agencies who kind of is on the same page.

So going forward, this budget we think is good. It speaks about fiscal discipline; yes, the consolidation is only gradual, but we believe there are scope for upward surprise in the future and that the country’s risk premium could reduce still as a result. That’s all for this week. Thank you for watching.