SA's treasury to trim 2024/25 budget deficit forecast

South Africa's national treasury will trim its 2024/25 budget deficit estimate next week as it aims to lower interest payments on debt, while the fiscal challenges it faces in the coming year are unlikely to slow consolidation efforts, a Reuters poll found.

In February, the treasury surprised economists and ratings agencies by announcing a much bolder consolidation path for the budget in coming years, and preliminary actual figures indicate it will probably be vindicated.

Consolidated budget forecast medians of 11 economists polled in the past week suggested the treasury would narrow its deficit forecast to 4.40% of gross domestic product (GDP) in the fiscal year that began in March.

That is 0.1 percentage point better than the treasury had anticipated in February, and a similar survey then of economists was even more pessimistic, predicting a deficit of 5.00% of GDP.

However, economists expect a deficit of 3.9% of GDP in the following year, 0.20 percentage points wider than the previous treasury estimate.

Still, the deficit is seen falling to 3.45% of GDP in the financial year 2026/27. It is then expected to slim to 3.25% of GDP the following year.

"This would come as the treasury aims to boost fiscal credibility and flatten a steep yield curve," added Jeffrey Schultz, chief economist for the CEEMEA region at BNP Paribas.

"Tax collection is set to pick up in the second half of FY24/25 on stronger investment and two-pot pension drawdowns," added Schultz.



Growth

Jason Tuvey, deputy chief emerging markets economist at Capital Economics, wrote in a note that finance minister Enoch Godongwana will be in the unusual position of presenting the medium-term budget policy statement (MTBPS) amid a sharp improvement in public finances.

He said the latest figures show the headline budget deficit stood at 3.30% of GDP in August, down from around 5.50% a year ago.

Tuvey added the key risk to public finances is that sluggish growth eventually results in frustration among elements of the ruling coalition and then austerity plans are watered down.

South Africa's economy is expected to expand 1.00% this calendar year, 1.70% next year and 2.00% in 2026, according to a survey conducted alongside the budget one.

The survey suggested the actual gross debt-to-GDP ratio accumulated by South Africa will be 75.55% of GDP in the new financial year compared with 75.3% in February government estimates.

It is expected around 75.00% in the following three fiscal years.



Costly

Still, the International Monetary Fund said last week the US and other countries where debt is projected to keep growing, including Brazil, Britain, France, Italy and South Africa, could face costly consequences.

The fund said the world's total public debt is set to exceed US$100 trillion this year for the first time and may grow quicker than forecast as political sentiment favours higher spending and slow growth amplifies borrowing needs and costs.

Some economists said the improved budget position is already baked into expectations for the South African fixed income yield curve, while others suggest it could lower longer-term borrowing costs.

Next week's budget review will set the stage for a credit rating review due by S&P in the middle of November.

Some economists expect authorities to adopt a new "fiscal rule" or "fiscal anchor" in a ploy to reduce the risk premium for South Africa, which is among the highest in emerging markets for bonds and leads to high interest payments.