Injection of R150bn a debt reprieve
• Profits on foreign reserves give Godongwana’s budget some breathing room • But taxpayers will not get relief from bracket creep
Finance minister Enoch Godongwana managed to set out a plausible path to halt SA’s public debt spiral with the help of profits on the foreign reserves, and this despite walking back from some of the spending cuts he pencilled in in November.
But he extracted an extra R18bn from individual taxpayers and kept spending growth at levels well below inflation over the next three years.
This came in a fiscal year which is now expected to see SA record its first primary budget balance surplus since 2008/09. Attaining a primary surplus, which means revenue exceeds non-interest spending, will help government stabilise the public debt at 75% of GDP by 2025/26 as planned.
And Treasury is working on proposals for a binding new fiscal anchor which would “chart a sustainable long-term path for the public finances”, it said, with director-general Duncan Pieterse promising there would be extensive consultation on the new anchor and that the Treasury would continue to target a debt-stabilising primary surplus in the interim.
Markets welcomed news that the Treasury and Reserve Bank had agreed to realise R250bn of the unrealised profits on SA’s gold and foreign exchange reserves over the next three years. It will inject a net R150bn of revenue, which government will use to reduce debt, cutting its cost of borrowing by R30bn over the medium term.
Many economists, including those at the IMF, had projected that SA’s debt burden would rise to 80% or even 90% of GDP without stabilising, with revenue falling short in a weak economy and spending pressures rising.
But Treasury insisted on Wednesday it had been on track to deliver on its commitments to fiscal consolidation even without tapping the unrealised profits on the reserves in the gold and foreign exchange contingency reserve account (GFECRA).
“What was already a debtstabilising path has been made significantly better by the GFECRA agreement,” said Treasury budget office head Edgar Sishi, who told Business Day that it would enable debt to be stabilised at a lower level and with less risk.
Godongwana on Wednesday tabled legislation in parliament that will enable R150bn of profits on the GFECRA to be transferred to government, which will use these to reduce its borrowing requirement, and a further
R100bn to the Reserve Bank as a contingency reserve to enable the Bank to meet the costs of “sterilising” these and prevent them being inflationary.
The GFECRA houses the unrealised profits or losses on SA’s gold and foreign exchange reserves. These are for the account of the Treasury, even though the reserves themselves are the Bank’s assets. The depreciation of the rand has seen the profits grow to R507bn, from R1.8bn in 2006. To realise the profits, the Bank will not sell down the reserves themselves. Instead it will create reserves at the commercial banks from which in turn the money can be transferred to the National Revenue Fund.
However, the Bank has to pay interest on those reserves, at the repo rate, in perpetuity, and since it has limited scope to do this using its own balance sheet, the Treasury will compensate it and improve its equity position.
Pieterse said the legislation would put a framework in place to govern how the GFECRA would be managed in future.
Godongwana also on Wednesday announced that he would this week publish the independent expert report on Eskom’s coal-fired power stations, which was a condition of
last February’s R254bn Eskom debt relief package.
And he stuck with his “tough love” approach to state-owned enterprises, declining to provide an equity injection for Transnet and telling journalists that “we are engaging with Transnet to do the right things so they should be able to sustain themselves.
“We think if they do the right things they would be able to service their debt.”
Treasury on Wednesday lowered its growth forecast to 0.6% for 2023 but raised it to 1.6% on average over the medium term, sticking to its deficit projection for the current fiscal year but reducing deficits for the next three years. It added R46bn to its revenue estimates for the medium term, which will come in large part from not providing any inflation relief for personal income taxpayers.
Though in November it pencilled in R213bn of spending cuts over four years, on Wednesday it added back R57bn of that, mainly to cover public sector pay increases in labour-intensive departments. However, spending will still contract by 0.5% in real terms over the medium term.
Godongwana said the net reduction in non-interest spending was R80.6bn over the medium term but emphasised government sought to achieve both sustainable public finances and development.
“We don’t counterpose them,” he said, noting government was still on course to spend R6 of every R10 of spending on the “social wage”.
HE STUCK WITH HIS TOUGH LOVE APPROACH, DECLINING TO PROVIDE AN EQUITY INJECTION FOR TRANSNET