Prime Minister Enoch Godongwana needs to craft an annual budget that balances the spending pressures of this year's elections with the South African National Treasury's efforts to stabilize its finances.
A rabbit in a fedora-wearing finance minister's hat could drain the country's roughly 500 billion rand ($26 billion) of emergency reserves.
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Mr Godongwana is expected to table the budget on Wednesday. It comes in the same week that President Cyril Ramaphosa is likely to announce the election dates. According to opinion polls, the ruling African National Congress is on track to lose its national majority for the first time since it came to power 30 years ago.
Independent economic analyst Bonke Dumisa said that due to the elections, “this is not the year for common sense and rationality in budget formulation.” “Otherwise all these predictions of the ANC losing power will get even worse.”
The minister said he was facing pressure to reflect the ANC's spending priorities.
These include Mr Ramaphosa's pledges earlier this month to expand and improve the R350 monthly social grant for the unemployed, legislate a national health insurance scheme and tackle the logistics crisis that is holding back exports. It will be done.
Transnet, which oversees the freight rail system and the country's main ports, is one of a number of debt-ridden state-owned companies seeking a multibillion-rand bailout from the Treasury.
Keabetswe Mojapelo, a macroeconomist at Rand Merchant Bank, said unlike previous elections that had little impact on fiscal policy, this year's vote carries new risks.
Mojapelo said there was “an increase in social spending aimed at pleasing the masses”, such as free higher education, which lacks viable financing mechanisms. “Much of this spending is driven by political motives and populism rather than sound economic principles.”
Spending pressures are weighing on South Africa's finances. And while the Treasury has warned of the possibility of new tax measures to boost revenue, consumers are under pressure and the commodity boom that boosted government revenues in 2021 and 2022 continues to grow. This will be a difficult task as the economy is on the decline.
As a result of this pressure, debt levels are expected to continue rising, peaking later and potentially higher than the Treasury's November forecast of 77.7% of gross domestic product in 2025-26. be.
This is where the Gold and Foreign Exchange Emergency Reserve Account (GFECRA) comes into play. This account is managed by the Central Bank on behalf of the Treasury and holds approximately R500 billion of unrealized gains arising from fluctuations in the value of the rand.
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“Unless GFECRA account proceeds are utilized for debt reduction, total debt will rise from 71% of GDP in 2022-23 to an estimated 75% in 2023-24, peaking at 78% in 2027. A recovery is expected thereafter, Barclays analyst Michael Caffe said in a research note.
GFECRA gains exist on paper unless realized through the sale of the underlying assets. Central Bank Governor Lesetya Kganyago warned that drawing down the country's foreign exchange reserves could make it more vulnerable to future exogenous shocks.
The Treasury was considering withdrawing half of the available amount in December.
Investors may welcome drawdowns if strict conditions are applied and the funds are used effectively to reduce budget deficits and debt.
“If leveraged, it would mean less borrowing to finance the deficit and provide some short-term relief,” said Farzana Bayat, fixed income portfolio manager at Food Asset Management. “There will be no need to increase nominal bond issuance, and the bond market will look favorably on it in the short term,” she said.
David Faulkner, an economist at HSBC Holdings, said if the Treasury does not rely on GFECRA, it may need to issue more rand-denominated bonds and increase the weekly supply of fixed-rate bonds to meet funding needs. He said no.
Still, “GFECRA could ease budget constraints, which could reduce the discipline needed to make tough policy choices and achieve long-term fiscal health.'' '' Faulkner said. “Without stronger policy tools to rein in spending or structural reforms to boost growth, we continue to believe that South Africa's fiscal outlook remains unsustainable, with debt levels unlikely to stabilize. I'm on guard.”
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