Power Utility Eskom is a wild card in South Africa’s debt stabilization plan

Content of the article

(Bloomberg) – South Africa has set more ambitious targets to stabilize public finances without having to raise taxes and revealed the outline of a plan to tackle unsustainable public service debt electricity in its budget update.

Content of the article

State debt will peak at 71.4% of gross domestic product in the current fiscal year – two years earlier and almost four percentage points lower than expected, while the budget deficit is expected to narrow by up to in 2026, Finance Minister Enoch Godongwana told Cape Town lawmakers. Wednesday. Indeed, the effects of higher inflation, which has strengthened nominal GDP projections, and improved revenue collection estimates outweigh the negative impact of higher borrowing costs and a lower exchange rate.

Content of the article

“When public finances are crippled with debt, it becomes very difficult to achieve our development goals,” Godongwana said. “We need to reduce our debt burden and debt servicing costs.

The medium-term fiscal policy statement shows President Cyril Ramaphosa delivering on his pledge to maintain fiscal prudence, though the outlook remains clouded by calls for support from state-owned enterprises, higher-than-expected pay demands by civil servants, a potential expansion of the social safety net and the tightening of global financial conditions.

Content of the article

The government plans to transfer between one-third and two-thirds of the roughly 400 billion rand ($22.2 billion) debt of the power utility Eskom Holdings SOC Ltd. on its own record and to impose strict conditions on the relief, according to Godongwana. More details will be announced in February.

The amount of support and the method of delivering the relief have not yet been finalized and are not directly reflected in the updated budget measures, said Edgar Sishi, the head of the budget office. One factor that will determine the amount of relief is future increases in electricity rates currently under review by the energy regulator, said Duncan Pieterse, head of Treasury asset and liability management. .

READ: Why power cuts are still crippling South Africa: QuickTake

Content of the article

Revenue is now expected to exceed previous estimates by R83.5 billion in the current financial year and nearly R100 billion in each of the following two years. No new tax is planned from next year, the Treasury said.

Godongwana affirmed his promise to moderate the civil service wage bill, which accounts for almost a third of public spending, even as unions plan to strike after the stalemate in wage talks.

To “avoid anticipating the salary negotiation process”, no provision has been made for increases during the year until March 2024, although “increases will have to remain within the limits of the budgetary resources available in order to not to jeopardize other spending priorities,” the Treasury said.

A monthly social grant of R350 which was first introduced to protect the poor from the fallout of the coronavirus pandemic will be extended for the third time until March 2024. The ruling African National Congress considers its security agenda as one of his greatest achievements in one of the most unequal nations in the world, and the latest extension could boost his chances of retaining his electoral majority in 2024.

Content of the article

READ: South African welfare recipients outnumber taxpayers

If the current monthly value of the subsidy and the participation rate remain constant and are extended indefinitely, the cost will increase at an annual average of 8.8% to reach 64.9 billion in 2031, and could threaten the sustainability of public finances, according to the Treasury.

« Discussions over the future of the grant are ongoing and involve very difficult trade-offs and funding decisions, » Godongwana said. « Any permanent expansion or replacement will require increased revenue, reduced spending elsewhere, or a combination of both. »

The primary budget balance, the government’s most critical fiscal anchor, will now shift to a surplus of R46.1 trillion, or 0.7% of GDP, in 2024 from a previous estimate of R3.2 trillion. rands. Technical work on the introduction of a new, more robust anchor is underway, the Treasury having already “tested the relevance” of a debt ceiling and expenditure or revenue rules.

After unexpected shocks ranging from the pandemic to deadly riots and floods, the Treasury will now increase its unallocated and contingency reserves to « cushion the framework for fiscal risks that may materialize over the medium term », he said. declared.

The economy is expected to grow 1.9% this year, 0.2 percentage points less than expected, and grow an average of 1.6% over the next three years.

—With help from Monique Vanek and Rene Vollgraaff.