What investors are watching in Budget 2023: Eskom, budget deficit, water supply, fuel costs – Nezo Sobekwa

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In a week that has seen another round of Stage 6 loadshedding with whispers of a dreaded Stage 8, Finance Minister Godongwana faces the task of incorporating a credible debt-relief plan for Eskom, while stabilising government finances in his annual budget, to be presented on Wednesday, 22nd February. Nezo Sobekwa from S&P Global told Biznews that investors would be looking at how the finance minister would be spending more money on Eskom debt, how he dealt with the public sector wage bill and what the country’s GDP growth prospects were. Sobekwa said there were positives in terms of revenue collection and the number of jobs that had been created but said that the budget deficit would have to be revised. Eskom was not the minister’s only headache, he said, problems with water supply and fuel costs were expected to impact growth. He expected the minister to say that he would not dish out more money to SOEs or salary increase, but that resolve could disappear down the road. And while the timing of a naval exercise with Russia and China was unfortunate while Ukraine marked a year since the Russian invasion, Sobekwa did not expect it to damage relations with the West. – Linda van Tilburg

The positives: Revenue collection and 1.2 million jobs 

I do think that we may not see positive surprises. I think the structural issues are real, and there’s really nothing too surprising to come out of it. The revenue collection has been great, and that’s a positive. We got about R20 to 30 billion more than we anticipated and a big reason for that was because of the commodity boom in 2020 and 21. The mining sector helped to spruce that up. We also saw that as a result of the commodity boom, the efficiency of the South African Revenue collection services (SARS) increased and that’s a positive in terms of revenue. What this would like to do is ensure that we don’t see increased corporate taxes because there’s this unexpected windfall from these great revenue collections. And so, we are unlikely going to see an increase in taxes. The fact that we’ve got about 1.2 million jobs that have come up and this is really great, having lost 2 million due to COVID, and that speaks to the infrastructure sector more than anything else, being one that’s beginning to drive some economic recovery. So, those are positives, probably the best that we can see. I don’t think there are surprises there. 

No money for other SOEs or public wages but concession in mid-term budget policy statement

We don’t think that in this budget there’s going to be more expenditure towards SOEs. But this is how it began at the beginning of last year’s budget speech and by the time we got to the midterms, the minister had to look at where the demands are, had to assess whether or not they were worth spending on and ended up spending about another R30 billion towards SOEs, 24 of those went towards Sanral and then some went towards Denel and others towards Transnet and so on. We anticipate something similar.

Particularly with the public wages, we’re going to have an election year in 2024 and there’s going to be increased pressure, particularly from alliance partners such as COSATU to ensure that there is some sort of being taken care of by the public sector to get the support necessary in those elections. So, the government and the ruling party is going to be under some serious pressure to come to the negotiation table. The mid-term budget speech would give us a clearer picture of that, as has been the case in the previous financial year.

The Budget deficit will have to be revised

We think that he’s going to have to revise the budget deficit and there are a couple of reasons for that. I think I had already mentioned there’s been the commodity boom. This has helped in terms of revenues, but there are a couple of things that we’re not going to have moving forward. For instance, demand is going to drop significantly. You’ve already got a global demand (and then inflation and economic growth) dwindling, and that’s going to impact South Africa’s growth. Moving forward, we also know that the growth prospects are going to drop. The current fiscal deficit is around 4.5 of GDP for 2023/24. But we think that this is likely going to increase to about 5% of GDP in 2023, and 2024. So, the necessities and the fact that it’s not going to be able to have what it had this year, the commodity boom, the increased jobs, about 1.2 million, it’s going to mean that growth prospects dwindle and that means that the deficit is likely going to increase beyond this year. 

Growth estimated at 0.7% with water supply and fuel shortages dragging it down

Fiscal projections are really difficult at this time. We’ve got projections by economists moving from 0.3% to about 1.4%. As S&P Global Market Intelligence, we’ve set this at about 0.7% and there are several reasons for this. Eskom is clear, but I think there are a couple of other things that are not at the surface that are going to drag growth. Water and water infrastructure supply is a big one. We’ve already started to see some water restrictions take place in metropolitan areas such as Tswana, the capital city of the country. We expect these to continue on and off in Durban and in the Eastern Cape, which are industrial hubs of the country. More than that, fuel shortages. The fact that we don’t have the refining capacity we used to have because of the shutting down of big oil refineries means that we are more vulnerable to any shocks that may hinder imports of fuel because it’s going to impact present electricity generation, but also a whole lot of industries that are heavy on fuel, including mining, which has been responsible for such great growth previously. So, outside of electricity, water and fuel are likely also going to drag growth. Our analysis as S&P global market intelligence has factored that in and we see growth sitting around 0.7%.

Russian/China naval exercise is not going to significantly disrupt relations with the West

Our baseline forecast is that we don’t think this is going to cause a significantly disruptive relationship between the West and South Africa and there are a number of reasons for this. In the first place, South Africa is already part of BRICS. Relations with Russia and China are expected. In defence of the South African government, the Minister of International Affairs did say that this had been planned since COVID. We understand why the timing of this is particularly precarious. We also think that South Africa would not be wanting to rock the boat in terms of its Western allies and its relationships, particularly with the EU, which remains a very significant trading partner. There’s also about 8.5 billion that has been secured and pledges from the west towards South Africa’s just transition policy, which is a very important part of the electricity restructuring. Also, by the way, one of the things that the Minister of Electricity’s portfolio will be looking at is just transition as well as climate control over and above those granular details about operations. As a result, all of those issues, we don’t even think that the US, according to our US colleagues, we don’t even think that the US would necessarily try to impose sanctions or try to deteriorate relationships. We understand that this has gotten a lot of media coverage and has resulted in quite a lot of criticism even internally. We’ve seen our opposition parties in South Africa criticise this as being some sort of tacit support for Russia in the Russia-Ukraine war. Our analysis and our experts point to the fact that this is unfortunate timing, but we don’t think that this would necessarily result in negative sentiment for investment.

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