Not the content, but the occasion of the “mini-budget” used to be more important.
In the half-decade before Enoch Godongwana took the reins at National Treasury, the department might have done well to install a revolving door at its head office in Pretoria – such was the coming and going of new finance ministers and their deputies. In that environment, with whispers of “state capture” filling both corridors and newspaper columns, the medium-term budget policy statement (MTBPS) took on extra significance.
The whole affair conjured images of Downton Abbey. Not the horses, the hounds or the family drama. More the idea of a new nobleman or -woman being presented to those who matter. From rural England, first Lady Mary, then Ladies Edith, Sybil and Rose were brought to London – the financial centre of the universe at the time – for a “coming out ball”. After a few waltzes and a lavish dinner, they were part of high society.
And so it was for Nhlanhla Nene (debuting in October 2014), Malusi Gigaba (October 2017) and even Tito Mboweni (October 2018). Unfortunately for Des van Rooyen, the weekend he was at the helm fell outside the MTBPS season.
The mini-budget then gave the markets and the public a look at what the new boss was like and clues as to whether the budget would be business as usual or would instead herald a looser, more “creative” approach to fiscal accounting.
But the stability of recent times has dialled down the pageantry of the mini-budget and turned it back into its usual old self. These days, it is once again a foreshadowing of the real business that will happen in February. Don’t expect any major policy announcements – that’s for the real budget.
Even in its diminished role, the MTBPS still commands attention. The minister’s face makes the front page of most newspapers the next day, and it’s typically the biggest online story of the day. Like serving brandy and Coke without ice – the ingredients are there, but the temperature is not quite right.
‘Big-number porn’
Overhyped, yes. The mini-budget is really about a few important indicators – “big-number porn” if you like – providing a clear picture of measures like the budget deficit, state debt and economic growth. These are estimates, as the measuring and the reconciliation are all still in process. But as more information comes in, more certainty can be attached to forecasts.
Inevitably, there are adjustments; some figures go up, others down, some stay the same. Pleasant surprises are met with approval by the markets. Unpleasant ones can lead to a selloff in bonds or the currency.
The latest MTBPS, for example, estimates economic growth of 1.1% this year – weaker than the already paltry 1.3% forecast in February. Falling short of those estimates triggered a flurry of trading activity. For Godongwana and South Africa, the problem was compounded by the hope that the numbers would exceed expectations.
By February, when most of these forecasts were put in the oven, the country was still reeling from load-shedding and fears that May’s general election could be followed by the worst paralysis and an ungovernable mess. Instead, Eskom Se Push has been relegated to a quiet corner of every app library, and the government of national unity (GNU) revived hopes that the country could actually have a collaborative and brighter future, a scenario that seemed impossible only months earlier.
As a result, the rand has strengthened against the dollar, and a feeling of stability and heightened expectation have taken hold. Many thought the GNU would immediately do more than numbers in the mini-budget actually showed this week.
“The rand weakened and bonds sold off immediately because the budget is based on the reality on the ground and not just positive thinking,” says Citadel chief economist Maarten Ackerman.
South Africa’s real problems remain massive. There is no need to list statistics on unemployment, poverty and our crumbling infrastructure; you probably see it on your way to the office, the shop, or from the comfort of your own home, when the taps run dry.
Economic growth can help address these challenges, but it will be a long slog. Over the next three years, growth is expected to accelerate to a very modest 1.8% per year on average, National Treasury now forecasts. It could reach as high as 2.5% if the stars align, but if things go wrong, it could be much closer to zero.
Bold changes needed
Structural reform, Godongwana said in his mini-budget speech, is the only way to break into a higher growth trajectory than the 1.8% likely in the medium term.
What’s wrong with the structure of the economy? For starters, the state spends too much and, if you ask businesspeople, on the wrong things.
Resources need to be reallocated to productive sectors of the economy, reckons Andrew Bahlmann, CEO of corporate and advisory at Deal Leaders International.
The budget deficit is narrowing, yes. But it is still beyond the rule of thumb of 3% that many an economics student of the early 2000s had drilled into them.
Godongwana sees the deficit this year at 4.7%, next year at 4.3% and 3.8% in 2027. Now, this doesn’t sound like “big-number porn”, right? But consider that this year’s deficit of 4.7% represents R355bn. That money needs to be borrowed from somewhere, and that, right there, that’s the problem.
The most hopeful sign in this mini-budget was not the actual numbers, but the stated intent of the political-purse masters to revive tricks that are so old that they almost seemed new. Embarking on an early retirement plan for expensive civil servants is a good start (see Currency’s story on that here).
But the need for bold policy changes remains pressing, says Bahlmann.
With any luck, the National Treasury will be able to deliver on those.
In the meantime, debt is the big concern. The debt-to-GDP ratio is now hovering above 75%, which Godongwana calls “unsustainable”.
And it would have been north of 80%, according to Ackerman, had National Treasury not monetised the Gold and Foreign Exchange Contingency Reserve Account in February. The move relieved some of the fiscus’s funding pressures.
At least there is one good thing about the recent GNU-related optimism that Godongwana and Co should utilise to its fullest: borrowing costs have come down.
In the words of the MTBPS: “The sovereign risk premium, which reflects investor concerns about economic and fiscal risks, has improved significantly between end-February and end-September 2024, from 327 basis points to 240 basis points. Over the same period, the generic 10-year bond yield declined by 153 basis points, indicating improved investor sentiment.”
Some more “big-number porn”, yes. But the bottom line is that it is now cheaper to borrow. And debt can be paid down quicker than just half a year before.
If Godongwana does more of the latter than the former, he could be the belle of the ball.