South Africa will overshoot its budget deficit target this year due to higher spending on public wages and an expected dip in tax receipts amid sluggish economic growth and lower commodity prices, economists told Reuters.
The National Treasury, which has in recent years worked to put South Africa on a sustainable fiscal path, in February projected that the consolidated budget deficit would narrow to 4.0% of GDP in the fiscal year ending in February 2024, the lowest in four years.
But the ailing economy, hit by South Africa’s worst ever power crisis, infrastructure bottlenecks and high unemployment, is exerting pressure on the public purse.
The budget deficit is likely to be between 0.5% and 1% above the 4% target for 2023/24, two economists said. London-based lender HSBC expects a deficit of 5.1% of GDP, while ratings agency Moody’s estimates it could reach 5.6%.
“We’re quite concerned that the overall fiscal deficit number is going to look worse,” said Sanisha Packirisamy, an economist at investment firm Momentum.
Packirisamy cited low growth, higher public wages, rising interest rates and lower tax receipts as some of the factors expected to impact the deficit.
Public sector unions and the government in March agreed to a 7.5% increase in wages. The treasury had factored in average annual increases of 3.3% to 2025/26.
The wage bill has a R37 billion ($2.05 billion) shortfall this year, Duncan Pieterse, deputy director general of the National Treasury, told Reuters.
The medium term budget policy statement (MTBPS) in October will outline a way to plug the gap, he said, without commenting on the budget deficit.
Thalia Petousis, a portfolio manager at asset manager Allan Gray, wrote in a May report that if the wage bill increases by 7% for another two years, it could hike the debt to GDP ratio to 80% by the end of 2025-26.
The treasury expects gross debt to stabilise at 73.6% of GDP in 2025/26.
Tax receipts
HSBC economist David Faulkner said on Monday the latest data showing that corporate tax receipts fell by more than 20% year-on-year in June and mineral royalties dropped by 40%, suggested a budget deficit that could widen more than anticipated.
“How the government will respond to this deteriorating fiscal reality, and how it will meet a heavier set of financing demands, are likely to be key issues as we head towards the MTBPS in October,” Faulkner wrote in a note.
The treasury had banked on higher commodity prices boosting mining tax receipts.
But prices of South Africa’s biggest commodity export – platinum group metals – have fallen this year. Platinum prices are down 13% year to date, palladium has lost 27% and rhodium has seen its value erode by two-third.
Andrew Matheny of investment bank Goldman Sachs, however, was hopeful.
“The top line should still look very good because precious metal prices are still sky high, especially in rand terms,” he said, adding the budget deficit would land closer to 4.5% of GDP.
