The Medium-term Budget Policy Statement (MTBPS) saw a better-than-expected market friendly fiscal statement, detailing a substantially improved fiscal situation and a significant further reduction in fiscal risk. However, detail around the restructuring of Eskom’s debt was deferred to the February 2023 Budget, despite Minister Godongwana’s guidance that this detail would be unpacked in the medium-term Budget. This could impact Treasury’s – and the Minister’s – credibility going into the next Budget policy, but overall, all other aspects of the statement were largely positive with a great mix including deficit reduction, debt ratio stabilisation and extra spending.

This is according to Chief Economist, Johann Els, who highlighted Treasury’s conservative assumptions and revenue budgeting as playing a noteworthy part in delivering a strong mid-term Budget.

“The MTBPS announced a deficit of -4.9% of GDP for this fiscal year (vs the -6% pencilled in for the consolidated budget in February 2022), compared to the -15.7% of GDP in projected in October 2020 for 2020/2021 and the -8.6% projected back then for the current year,” he says. “This shows a considerably reduced debt-to-GDP ratio, which is now likely to stabilise at around 20% lower than what was expected in October 2020 – with the possibility that Treasury could lower their forecast of the debt to GDP ratio trajectory in the MTBPS even further.”

He points to the better-than-expected deficit and primary balance outcomes, improved debt ratio outlook and continued strong emphasis on fiscal consolidation as positive outcomes that will all contribute towards approval from the markets. “Extra spending for social grants and SOE’s is looking affordable at this stage and should reduce risks in these areas too,” he adds.

“Notably, the primary balance – which is the budget balance excluding interest payments – is looking close to zero, at -0.2%, compared to the -1.2% target, and should improve to +1.5% by 2025/26 – putting it in positive territory for the first time in 15 years,” he points out.

Regarding the Wage Bill risk, this was only increased by 1% in the 2023/24 Budget, with MTBPS stating that to avoid pre-empting the wage negotiation process, no provisions have been made for wage increases in 2023/24.

“It’s disappointing that despite guidance over the last few weeks that there will be detail in the MTBPS regarding how to deal with Eskom’s debt, the detail was delayed until the February 2023 budget,” emphasises Els. “However, the Minister did allude to the quantum of the debt relief at between one-third and two-thirds of Eskom’s current debt, as well as saying ‘Importantly, the programme will include strict conditions required of Eskom and other stakeholders before and during the debt transfer’, which points to the conditionality that we have been expecting from the programme.”

Els has previously warned that the benefit of increasing commodity prices is set to fade and cannot sustain revenue increases indefinitely, but he is comfortable that the MTBPS has factored this in. “The MTBPS’s upward revenue adjustments were expected and seem realistic, given better recent performance and the better base. Treasury’s assumptions for corporate taxes are very conservative as they expect windfall benefits from commodity prices to fall away. They also expect better SARS performance to assist.

He also highlighted that Treasury’s priorities for the Fiscal Strategy as outlined in the MTBPS are encouraging.  “They aim to achieve fiscal sustainability by narrowing the budget deficit and stabilising debt, as well as to increase spending on policy priorities such as security and infrastructure – thus promoting economic growth – and reduce fiscal and economic risks and build buffers for future shocks. All priorities that send the right message,” he added.