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South Africa’s Treasury has warned that the country’s stagnant economy has left the government with far less tax revenue than planned, leaving President Cyril Ramaphosa with difficult choices ahead of next year’s crunch election.
Enoch Godongwana, finance minister, said in his medium-term budget update that rising fiscal pressures on Africa’s largest economy would strain “scarce public resources” and result in action “to review and reconfigure the structure and size of the state”.
Ramaphosa and his governing African National Congress face an uphill battle to retain their majority when the national vote is held in May or June. The contest is viewed as the party’s toughest test in 30 years of South Africa’s democracy.
Rolling power blackouts and logistics crises at the troubled Eskom and Transnet state monopolies have hit South African growth this year, along with the profits of major taxpayers such as miners.
The Treasury said the South African state would collect nearly R57bn ($3bn) less tax than hoped this fiscal year, with this year’s budget deficit now closer to 5 per cent of gross domestic product, versus the 4 per cent initially planned. This gap is widening as South Africa faces higher borrowing costs from the global increase in interest rates.
“Our challenge is that rising debt service costs are crowding out important social spending, and our economy has not grown fast enough to support increasing expenditure or our current debt levels,” Godongwana said.
South Africa’s average borrowing cost across its debt has risen to 9.5 per cent, versus 8.3 per cent earlier this year. Foreign holdings of South African bonds have fallen markedly in recent years and local investors have been cautious about absorbing more debt issuance.
The Treasury has already launched measures to contain state spending outside education, health, welfare grants and housing. It flagged R15bn of tax rises coming in next year’s budget.
That budget will fall in the midst of a battle by the ANC to retain its national majority, with recent polls indicating that support for the party was below the 50 per cent mark.
Transnet’s inefficient running of South Africa’s commodity freight railways may have cost the economy more than R410bn, or nearly 6 per cent of GDP last year, according to the Treasury.
Transnet has warned that it will not be able to sustain its R130bn debts without state help. But only once it commits to deeper reforms “will there be a conversation about whether and how government can provide financial support to transform the logistics sector”, Godongwana said.
Ramaphosa’s government is already providing a costly bailout to cover Eskom’s debts over the next few years, to give it financial space to turn around a descent into record power cuts during 2023.
Godongwana “appears to have done enough for now to prevent fiscal concerns building further”, said Jason Tuvey, deputy chief emerging markets economist for Capital Economics. “But the path to stabilise the public finances remains narrow.”
