Finance Minister Enoch Godongwana yesterday presented the Medium-Term Budget Policy Statement (MTBPS).
He addressed Eskom’s debt transfer and public wages, but details about Infrastructure Fund and comprehensive social security plan weren’t included, according to this commentary from PwC South Africa.
We expected the MTBPS to address six key challenges to the country’s economic and fiscal sustainability, namely:
* A transfer of Eskom’s debt to the sovereign balance sheet
* Actions to avoid Financial Action Task Force (FATF) greylisting
* Clearing the backlog in processing critical skills visas
* A framework for a comprehensive social security system
* Management of the public wage bill
* Progress with the Infrastructure Fund pipeline
A transfer of Eskom’s debt to the sovereign balance sheet
One of Eskom’s biggest financial challenges, as it strives to improve power delivery, is its debt load of around R400-billionn. The National Treasury plans to transfer a large proportion of this to the sovereign balance sheet — between a third and two-thirds of this amount, according to the MTBPS.
While the relevant debt instruments and method of implementing the relief are not yet finalised, we are encouraged by Minister Godongwana’s comments that the debt transfer programme “will include strict conditions required of Eskom and other stakeholders before and during the debt transfer”.
These conditions will address the power utility’s challenges with operating costs, payment arrears, and greater clarity and transparency in tariff pricing. Much greater detail will be provided in the annual budget during February 2023.
Actions to avoid Financial Action Task Force (FATF) greylisting
The National Treasury took a leading role over the past 12 months in finding answers to the FATF greylisting risk. The finance minister said the state is “doing everything necessary” to prevent the greylisting. This includes two bills tabled to parliament to address weaknesses in the legislative framework which are expected to be passed by the end of this year.
However, the MTBPS did not comment on the fact that in-progress legislation will likely not count towards the progress report that South Africa needs to provide the FATF in November 2022. In other words, the key legislative changes needed to avoid greylisting might be approved too late to succeed in this endeavour.
Lullu Krugel, PwC South Africa chief economist, comments: “If greylisted, South Africa would see its private sector endure increased international transactional and compliance costs. Research by the International Monetary Fund (IMF) shows that in the 89 emerging and developing countries greylisted during 2000-2017, this resulted in a drop in capital flows equal to 7.6% of GDP over a period of nine months. This would result in negative pressure on the rand exchange rate, higher imported inflation, and possibly additional interest rate increases.”
Clearing the backlog in processing critical skills visas
While most foreign-owned firms in South Africa have a majority local representation among their staff, their operations are frequently dependent on the presence of foreign nationals in key positions. Foreign-owned firms have voiced their frustration on current delays in getting these visas approved.
We have previously highlighted the importance of skilled workers for business performance and economic growth. However, the MTBPS did not address the delays in processing the applications, which we hoped would get supported with additional finance and human resource capacity.
A framework for a comprehensive social security system
The Finance Minister indicated in September that the MTBPS was likely to contain some comments about income support as part of a larger framework for a comprehensive social security plan. For now, the temporary R350 COVID-19 Social Relief of Distress (SRD) grant was extended for another year (to March 2024) as the National Treasury continues to look at how a possible permanent extension thereof can be financed.
This would require increased fiscal revenue, reduced spending elsewhere, or a combination of the two. The MTBPS did not elaborate on progress in fleshing out detail on the comprehensive social security plan.
Christie Viljoen, PwC South Africa senior economist, says: “The extension of the R350 grant is welcomed given that the outlook for fiscal revenues in 2023/2024 has improved and could be R95bn more than previously projected. This will have a positive socio-economic impact on South Africa.
“However, it is critical that the framework for a comprehensive social security must be detailed in Budget 2023 given the country’s socio-economic challenges and ongoing widespread debate about a basic income grant (BIG). There are currently 12.3 million unemployed adults in the country with many looking at the state for solutions to their financial dilemmas.”
Management of the public wage bill
South Africa is currently at risk of a large-scale public sector strike for the first time since 2010, with several major public sector unions declaring disputes with the government this month.
The MTBPS was expected to firmly reiterate that the government is not reneging on its pledge to reduce the pressure exerted on the budget by remuneration costs. This was indeed the case as the finance minister announced that the fiscal framework has been updated to accommodate a pensionable salary increase of 3% for public servants.
The increment is notably lower than what labour unions are currently asking for.
Progress with the Infrastructure Fund pipeline
February 2022 saw the last substantive update on project feasibility for the government’s keystone infrastructure endeavour aimed at crowding-in private investment into major infrastructure projects.
While Minister Godongwana noted that the government is still committed to crowding-in private investment into the delivering of public sector infrastructure, the MTBPS document provided no substantive update about the pipeline of projects. It also highlighted a likely R4,2-billion in unspent allocations to the Infrastructure Fund during the current fiscal year. On a positive note, the National Treasury recommitted to allocating R100-billion to the fund over a 10-year period.
Finally, to this list of six we also add consideration for the Just Energy Transition. With the start of the 2022 United Nations Climate Change Conference (more commonly referred to as COP27) just days away, there is a keen focus on any official statements that could provide more detail on this topic.
Climate risk was mentioned several times in the MTBPS and it noted that fiscal policy will continue to play a role in shifting economic incentives towards cleaner forms of energy. In this regard, the Finance Minister noted that South Africa is finalising negotiations on the pledges by the International Partner Group for the country’s Just Energy Transition.
The MTBPS did not contain anything new about this topic and we suspect the government is keeping major announcements for COP27.