National Treasury will table the 2022 Medium-Term Budget Policy Statement (MTBPS) on 26 October 2022 within a challenging global economic outlook. In its World Economic Outlook released last week, the International Monetary Fund expects 34% of the global economy to be in recession this year or in 2023, up from just under 5% at the beginning of the year.

Russia’s war on Ukraine heightened the acceleration in global inflation, particularly food and energy. The Euro area’s economy is in recession due to the energy crisis following the reduction of gas supplies from Russia. The United Kingdom’s inflation, interest rate, growth and fiscal outlooks have worsened following the announcement of the now partially reversed unfunded fiscal stimulus. Meanwhile, the rising US interest rates will slow US and global growth to near recession in 2023. A global cost-of-living crisis and debt distress in some emerging markets present challenges for policymakers.

Within this global context, Finance Minister Enoch Godongwana faces tough choices in his MTBPS next week. The most consequential is a solution to reduce Eskom’s R392bn debt to improve its balance sheet so that it can finance itself in the open market. The debt relief is widely expected in the region of R200bn. There are no easy solutions as the currency composition and exchange rate movements affect what can and can’t be done. More so, the terms of the debt provided by development finance institutions (DFIs) and credit export agencies are likely to be difficult and lengthy to negotiate for a debt transfer solution. Markets, investors, and credit rating agencies expect some solution to properly assess South Africa’s fiscal position and therefore credit rating.

There is also an expectation of details on the structure, quantum and terms of the US$8.5bn Just Transition financing. Key will be how much is disbursed, the terms attached to them and whether this increases the state’s debt levels or not. A lot remains unclear, and details will clarify the assessment of the fiscal position.

The second major policy decision that will have an impact on the country’s fiscal position is on the Social Relief of Distressed (SRD) grant. Given the cost-of-living crisis on top of the covid-19 impact, there is pressure to convert the SRD grant into a permanent universal basic income grant (BIG). We expect that the SRD will be extended for another year to March 2024, but remain unfunded after that. This would signal that it’s a temporary measure and that future extensions will only depend on the availability of funding from tax revenue collections and economic growth.

Apart from Eskom and BIG, the government wage bill and funding of other SOEs will be key for the fiscal position and credit ratings. Beyond the immediate year, fiscal policy must frame government’s strategy on solving long-standing policies that will encourage investment, grow the economy, create jobs and reduce poverty. In this respect we expect very little to change in the MTBPS as all is encompassed in the economic and recovery plan, of which we expect an update of progress made since the February 2022 Budget.

The actual fiscal deficit and debt ratios will likely show marginal improvement for this current fiscal year and next, but the medium term has significant risks of derailment. We expect the fiscal deficit of just under 5% of GDP and a debt ratio to improve to 70% of GDP, peak around 73% of GDP but be sticky above 70% of GDP over the medium term.

ENDS