Independent economist Mandla Maleka has expressed concerns about the South African economy’s trajectory following the Midterm Budget Policy Statement (MTBPS).
The MTBPS was presented by the Minister of Finance, Enoch Godongwana at Parliament on Tuesday. And Maleka referred to this as a sombre occasion.
He pointed out that the balance of payments deficit is expected to exceed 3%. This is a sign that imports would continue to outperform exports. Even as improvements in electricity supply and logistics occur, he said.
Weaker balance of payments
He said a weaker balance of payments could lead to a depreciated currency, a possible lift in inflation, and straining government bonds.
“Secondly, economic growth of 1.1%, some 0.1 percentage lower than February 2024 budget is rather worrying. Despite the evident trend in easing of interest rates. Interest payment is expected at over R330-billion this current year. [It will] culminate in over R1.2-trillion in the medium term,” said Maleka.
He also highlights that the MTBPS forecasted a R22-billion decline in revenue. With expectations that this shortfall will persist at around R20-billion over the medium term.
He criticised this outlook, suggesting that the optimistic portrayal of a primary fiscal budget surplus contradicts the troubling realities of tax revenue buoyancy, which he believes could fall below 1%.
Interest rate cut implications
“What the MTBPS lacked is the obvious. That is, if inflation is expected to remain at circa 4.5% in the medium term, then there should be acceleration of interest rate cuts to lift growth above 1%.
“That will lift revenue and buoyancy. And thus allow for an even bigger budget revenue. Lower interest rates are both supportive of higher growth and higher revenue collection,” said Maleka.
He believes lower interest rates are essential for both stimulating growth and enhancing revenue collection. This to allow for a more robust budget.
Maleka said reducing rates while enhancing infrastructure should foster growth and increase revenue.
Servicing debt
He explained that if the country expects the debt-to-GDP ratio to stabilise at 75%, it implies that a larger portion of the tax revenue would go towards repaying debt.
Most of this debt, according to Maleka, is domestic. And this means local financial institutions are profiting from a government that continuously borrows.
“That is why the fiscus is cutting expenditure in the wrong areas. So as to honour debt obligations.
“The rand remained unchanged, meaning the MTBPS was currency-negative. Yields on 10-year government bonds were also unchanged, again unmoved by a rather sombre delivery. With inflation heading lower, one would expect yields on long dated stocks or bonds to follow suite,” said Maleka.
