The mid-term budget (scheduled for October each year) serves as a “half-time” report for how the country is tracking against the initial budget (scheduled for February each year). Treasury also uses the same opportunity to redirect spending as and when needed. Further to that, it sets the tone/framework for the following year’s budget. The key metric here is GDP (its growth and quality) This report seeks to summarise the key points delivered in the 2021 mid-term budget speech as well as outline key insights (the “so what”).
|Initial Estimate||Revised Estimate||Comment|
|Real GDP growth||3,3%||5,1%||✓|
|2021||Cumulative 2022 – 2025|
|Revenue less Expenditure (a budget deficit)||(R479 billion)||(R1 080 billion)||✗|
Key points from the budget
|Recovery, stability, reform, and growth Economic recovery is quicker than anticipated owing to bullish commodity prices. Revenue 1 648 billion Expenditure R2 128 billion||Economic outlook Inflation is contained within the target band, despite upward pressure from food and energy prices. Output is expected to return to pre-pandemic levels in 2022.|
|Fiscal policy Reduce debt-service costs to below 22 percent of main budget revenue by 2026/27. The consolidated budget deficit will measure 7.8 percent of GDP in 2021/22 and narrow to 4.9 percent in 2024/25||Expenditure priority Revenue collections exceed initial projections by R120 billion. Consolidated government spending is expected to increase from R2.13 trillion in 2021/22 to R2.24 trillion in 2024/25, at an average annual growth rate of 1.7 percent. No spending reductions are proposed in the 2021 Medium Term Budget Policy Statement (MTBPS)|
- The “tough love stance” towards SOEs is a much welcome sentiment. No additional funding was allocated to SOEs for the remainder of the budget year (Eskom included) In our commentary on the February budget, we highlighted the need for SOEs to run as sustainable entities so that the budget is not a constant musical chairs of bailout circus.
- While inflation is within the target band in the current low interest rate environment some credit should go to a weak consumer environment on the back of high unemployment (currently at 34%).
- Consumer demand is showing some resilience (projected at 5,7% growth), almost at par with real GDP growth a good sign at the current levels of unemployment. Again, the real GDP and Consumer demand numbers are coming off lower bases.
- Excess revenue (R120 billion) collected to be used to reduce net loan debt which is currently sitting at R4 089 billion will reduce is this amount by 2,9%. This is a prudent approach as this will create room for future borrowing, notwithstanding the relatively untapped borrowing capacity seeing as foreign debt is sitting at R470 billion (11,5%). We have previously warned, however, that increasing foreign debt may result in a much volatile Rand thereby undermining growth.
- Some citizens in parts of the country may have missed the live broadcast of the budget speech, thanks to scheduled load shedding. The liberalisation of energy generation is a welcome item tabled in the budget. However, the initiative does not seem to be backed by a solid cohesive action plan (e.g the funding support) and specific timelines. For example, the DBSA issued as call for the funding of Embedded Generation of Electricity with a due date of 30 Sept 2021. To the best of our knowledge many municipalities are only calling for IPPs for the generation of electricity and are yet to adjudicate and thus enter into off-take arrangements with Independent Power Producers. Off-take agreements are, however, a centre-piece requirement for access to funds from DBSA. South Africa is faced with an energy crisis, it is thus, imperative for government to lead the much-needed transformation to secure energy.
- Capital Expenditure is forecast to continue averaging around 9% of total expenditure for the mid-term which is below the pre-pandemic levels. A disappointing prospect for a developing country like South Africa, whose BRICS counterparts are allocating an average of 27% (World Bank most recent data; China 43%, Brazil 16%, India 27% & Russia 22%). Capital deepening is essential to improving SA’s economic growth.