By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Looking over fiscal policy documents between now and the 1990s would give the impression that South Africa (SA) has been stuck in a time loop with the same socioeconomic objectives, same drive for economic reform, and the same fiscal constraints. However, going into the early 2000s, there had been major achievements in formulating macroeconomic policy, formalising implementation frameworks, and setting processes of accountability. Ahead of the 2009 financial crisis, SA was running a slight budget surplus, while inflation and interest rates were lower - supported by the adoption of inflation targeting. The Global Financial Crisis (GFC) had a severe effect on emerging markets, but SA's internal missteps resulted in a much more protracted recovery. Over a decade, and another global crisis later, budget reviews sound the way they did in the 1990s - and have been for some years. That said, there are some clues that fiscal policy is experiencing a new dawn and that, with consistency, budgets decades from now may spell out new challenges and opportunities.
Clue 1: Deviations between budgets have not been materially and systemically negative
The 2010s were plagued by a progressive loss in budget credibility. Although National Treasury spoke extensively about fiscal consolidation, successive budgets showed worsening trends. Fiscal policy was not only procyclical, expanding as terms of trade improved, but policy was also structurally expansionary. Recent budgets have shown more commitment to consolidation through the policy choices that are being made. A tough stance towards what had become the unquenchable financial demands of State-Owned Entities and a ballooning wage bill, while strengthening the South African Revenue Service has been key. As a result, negative shifts in projections relative to prior budgets have not been systemic and we have had an improvement in some instances. Furthermore, expectations of SA running a primary surplus and debt peaking in the medium term have been upheld.
Clue 2: Structural reform is solidified
The progress that has been made through Operation Vulindlela has supported government in translating reform goals to concrete and deliverable objectives. In line with this, reforms in areas such as telecommunications, the visa system, water licensing, electricity generation and transport should gradually yield results. In the latest mid-term budget update, Treasury also spells out the steps necessary to make public-private partnerships in logistics more viable and attractive. As SA addresses the binding constraints to economic activity, growth will accelerate, revenues will improve, supply-side inflation should be less cumbersome, and the idiosyncratic cost of attracting capital should ease. In fact, expectations that SA would face another sovereign downgrade have been reversed. This will serve to solidify the fiscal position.
There is no doubt that SA's fiscus is on more solid ground than it has been in a decade. However, we have seen such improvement before and then quickly diverted. This should highlight the need to ensure strong leadership and insulate state institutions as well as public finances. Furthermore, any chance to build buffers should be optimized given all the unfolding global risks that could keep interest rates high and maintain spending pressure on governments, adverse risk sentiment and climate change for example. Decades from now, we hope to read about financing projects for state-of-the-art floating freight ports and bridges, or AI robot tutors being rolled out to foundational-phase children. Something other than rebuilding capacity and restoring infrastructure.
Week in review
SA's gross foreign exchange reserves fell to $63.0 billion in October, from $63.6 billion in September. While gold reserves continued to rise, Special Drawing Rights (SDR) holdings and foreign exchange reserves declined. There were payments made on behalf of the government, including a partial repayment of an International Monetary Fund loan.
Electricity production growth was 8.5% y/y in September, up from 6.3% in August. Seasonally adjusted electricity production increased by 1.6% m/m, after falling by 0.7% in the previous month. Over the third quarter, electricity production grew by 2.9% on average, and would have contributed to overall economic growth.
Week ahead
On Tuesday, the Quarterly Labour Force Statistics for 3Q24 will be published. In 2Q24, employment declined by 92 416 q/q, completely reversing the 21 555 jobs gained in 1Q24. Unemployment increased by 157 936 q/q, bringing the total number of unemployed individuals to 8 383 824. Meanwhile, the total labour force grew by 65 520. This growth was slower than the rise in unemployment, resulting in an increase in the unemployment rate from 32.9% in the previous quarter, to 33.5%. Compared to 2Q23, employment increased by 306 140, reflecting a 2.6% year-to-date growth from January to June, compared to the same period last year.
Also on Tuesday, data on manufacturing production for September will be released. Manufacturing output, not seasonally adjusted, contracted by 1.2% y/y in August, following an expansion of 1.6% y/y in July. Seasonally adjusted manufacturing output fell by 0.6% m/m, partially offsetting the 1.6% monthly expansion in July. The decline in monthly output was reflected in the manufacturing PMI business activity index, which fell deep into contraction, reaching 38.9 points in August. However, this index rebounded to 50.7 points in September, indicating a potential recovery in monthly output. For the three months ending in August, output was flat at 0.1%, but September's output is likely to show growth.
On Thursday, data on mining production for September will be released. Mining production, not seasonally adjusted, increased by 0.3% y/y in August, following a 1.0% y/y contraction in July. Excluding gold, output rose by 1.1% y/y. On a seasonally adjusted basis, mining output surged by 2.9% m/m, more than offsetting the 0.8% decline in July. However, output was still down by 1.4% over the three months ending in August, signalling that without sustained monthly growth, the mining sector could potentially weigh on GDP in 3Q24.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 7 Nov | SA | Gross foreign exchange reserves $ billion | Oct | 63.0 | 63.6 |
| SA | Electricity production % y/y | Sep | 8.5 | 6.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 12 Nov | SA | Unemployment rate (%) | 3Q24 | -- | 33.5 |
| SA | Manufacturing production % m/m | Sep | -- | -0.6 | |
| SA | Manufacturing production % y/y | Sep | -- | -1.2 | |
| 14 Nov | SA | Mining production % m/m | Sep | -- | 2.9 |
| SA | Mining production % y/y | Sep | -- | 0.3 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 85,998.22 | 0.7% | -0.4% | 18.7% |
| USD/ZAR | 17.31 | -1.7% | -0.5% | -6.3% |
| EUR/ZAR | 18.71 | -2.5% | -1.7% | -5.4% |
| GBP/ZAR | 22.47 | -1.0% | -1.2% | -1.0% |
| Platinum US$/oz. | 997.34 | 0.3% | 2.1% | 14.4% |
| Gold US$/oz. | 2,706.71 | -1.4% | 2.4% | 38.8% |
| Brent US$/barrel | 75.63 | 3.4% | -6.5% | -4.9% |
| SA 10 year bond yield | 9.80 | -1.1% | -0.6% | -12.5% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 1.0 | 1.9 | 1.9 | 2.2 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.4 | 2.3 | 2.1 | 2.4 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -0.8 | 5.4 | 3.9 | 5.3 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.5 | 4.3 | 4.7 | 4.5 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.4 | 5.0 | 4.6 | 4.5 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.50 | 18.20 | 17.50 | 18.20 | 18.80 |
