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Finance Minister Tito Mboweni will need the skills of a trapeze artist when he delivers his budget speech on Wednesday.
The former central banker will need to balance rising pressures on both the income and expenditure side of state finances.
According to PwC calculations, revenue in the current (2018/19) fiscal year will fall short by at least R10 billion compared with projections in October’s medium-term budget policy statement.
This is largely due to underperforming collections of personal and corporate income tax.
This will see the budget deficit widen to R212 million – an equivalent of 4.3% of GDP.
If nothing is done on the expenditure side, the budget shortfall could widen to nearly R250 million in 2019/20. This would be equal to 4.7% of GDP – the highest since 2012.
The gaping deficit will see more upward pressure on government debt levels – and this will worry the ratings agencies.
In addition, the minister is grappling with the worsening financial situation of state-owned enterprises.
Credit rating agencies, in particular, have raised that the state-owned enterprises remain a risk to the sovereignty of the South African state.
Forecasts by S&P Global Ratings see government guarantees for state-owned enterprises debt rising to R500 billion by 2020.
Amid rolling blackouts, President Cyril Ramaphosa told Parliament on February 14 that the budget speech would indicate how government would assist Eskom in stabilising its finances.
This, analysts speculate, could be in the form of cash or support with mounting debt.
The power utility “is in crisis and the risks it poses to South Africa are great”, commented Minister of Public Enterprises Pravin Gordhan on February 12.
His newly minted nine-point plan for bringing Eskom back from the brink of collapse will require time and money.
Several media reports have indicated that loadshedding is costing the South African economy R1 billion per stage, per day.
As such, Minister Mboweni will no doubt also revise lower his near-term economic growth expectations compared with the medium-term budget policy statement.
On a positive note, he will also focus on faster growth rates in coming years as a partial fix for the revenue challenge.
The minister will also be looking at practical approaches to increasing economic growth to levels above the population growth rate.
Two proposed solutions that the minister recently shared with media include an agreement where the private sector deploys skilled people to government, as well as arrangements that would facilitate skilled immigration.
PwC expects the 2019/20 budget to refrain from making any significant tax increases. Small increases are, however, expected in personal income tax and medical tax credits via fiscal drag.
It is possible that there will also be some tax increases through capital gains tax on individuals, ad valorem duties and securities transfer tax, as a last resort to raise additional revenues.
Rating agencies should expect Minister Mboweni – who headed the South African Reserve Bank from 1999 to 2009 – to comment on the central bank’s independence and mandate.
The key requirement here is echoing earlier statements by himself and President Ramaphosa that the government would not tamper with the bank’s inflation-targeting mandate.
Nonetheless, despite such expected reassurances on the monetary policy front, the overall precarious fiscal situation has increased the risk of Moody’s Investors service also downgrading the sovereign to so-called junk status.
All of these factors are in focus in coming days and, in fact, in coming months as South Africa heads towards elections in early May.
Minister Mboweni certainly has an unenviable task of balancing financial and political challenges.
• Christie Viljoen is an economist at PWC Strategy&
