Budget 2024: HSBC forecasts spending risks from wages, social grants & Transnet

South Africa is gearing up for the announcement of its budget next week by the Minister of Finance, and experts are already forecasting potential spending risks. David Faulkner, Economist at HSBC's South Africa and Sub-Saharan Africa office, recently shared his insights on what to expect in the upcoming budget announcements. Faulkner highlighted concerns regarding the country's fiscal deficit numbers, emphasizing pressure on both the revenue and spending sides. He anticipates a deficit of 5.2% of GDP for the fiscal year 23-24, attributing much of it to spending and revenue that have already occurred or are planned. The reliance on T-bill issuance and drawing down cash for financing indicates a potential budget deficit slippage that could persist into the medium term. One of the key themes discussed in the interview was the medium-term outlook and the potential risks surrounding fiscal consolidation. Faulkner pointed to spending risks as a primary focus, mentioning uncertainties around the sustainability of the SRD grant, support for SOEs like Transnet, and wage dynamics in the public sector. These factors could contribute to persistently high deficits, delaying fiscal consolidation efforts and leading to unsustainable public finances. In addition to spending risks, Faulkner also addressed concerns about revenue risks in the budget forecast. Lower commodity prices, sluggish economic growth, and revenue shortfalls could pose challenges for the government. While the Treasury has adjusted its revenue forecasts, there are still potential downside risks, especially in corporate taxes and personal income tax collection. Faulkner estimated a structural shortfall of around 35-40 billion rand per year over the medium term, highlighting the need for careful revenue planning. The discussion also touched upon the potential impact of further postponing fiscal consolidation and increasing debt issuance. Faulkner emphasized that market sentiment could sour if the government deviates from its financing strategy, particularly in terms of government bond issuance rates. However, he noted a potential alternative financing source in GFECRA reserves, which could help mitigate immediate borrowing needs despite deteriorating fiscal outcomes. This balancing act could be essential in maintaining market confidence while addressing fiscal challenges. Regarding social grants, public sector wage bills, and overall spending, Faulkner highlighted them as significant risks to South Africa's fiscal position. Efforts to control public sector wage growth, the extension of the SRD grant, and unfunded liabilities like the NHI pose challenges to achieving sound public finances. Faulkner stressed the importance of aligning permanent expenditure increases with revenue growth to ensure sustainability. As South Africa prepares for its budget announcement, the insights shared by Faulkner offer a glimpse into the potential risks and challenges facing the country's fiscal outlook. With a focus on balancing spending and revenue concerns, policymakers will need to navigate carefully to secure the country's financial stability for the future.