South Africa Aims for Tax Increase Amid Forecast of Rising Debt Peak, According to Reuters

By Kopano Gumbi, Anait Miridzhanian, and Wendell Roelf

CAPE TOWN (Reuters) – South Africa’s finance minister is set to propose tax modifications next year as part of efforts to stabilize public finances, which are feeling the pressure from declining mining revenues, according to a mid-term budget review presented on Wednesday.

The budget document projected an increase in deficits over the next three years and indicated that debt would peak at a level higher than was forecast in February when the main budget was introduced.

For the current fiscal year 2023/24, revenue collections are anticipated to be 56.8 billion rand ($3.04 billion) lower than estimates made in February.

The National Treasury affirmed its commitment to spending cuts, moderate tax adjustments, and efficiency improvements through the merging or closing of underperforming public entities, many of which have required multiple bailouts in recent years.

"In light of the substantial fiscal consolidation needed, the Finance Minister will propose tax measures to generate an additional revenue of 15 billion rand in the 2024/25 budget," stated the Treasury.

However, specifics regarding the proposed tax measures have not been disclosed.

Following the new budget forecasts, which exceeded market expectations, both the South African rand and government bonds experienced gains, as noted by Andrew Matheny, an economist at Goldman Sachs. "The overall message emphasizes a continued focus on spending-led fiscal consolidation," Matheny remarked.

STATE FIRMS AFFECT GROWTH

Economic growth in South Africa for 2023 is now projected at 0.8%, a decline from the 0.9% forecast in February, and significantly lower than the 1.9% growth achieved last year.

A major barrier to growth stems from state-owned enterprises. The power utility Eskom is facing the most severe rolling blackouts in history, and inefficiencies at Transnet—responsible for freight rail, ports, and pipelines—have hindered the export of commodities.

The Treasury mentioned it is revising Eskom’s debt-relief terms so that loans will carry interest, as opposed to being interest-free, “to prevent repeating the mistakes made in previous bailouts.”

Finance Minister Enoch Godongwana told Reuters on Wednesday that his team is developing a long-term resolution for Transnet’s issues, which has recently requested a bailout; however, he did not specify how much financial assistance would be provided.

WIDER DEFICITS

A consolidated budget deficit of 4.9% of Gross Domestic Product (GDP) is now anticipated for 2023/24, wider than the 4.0% deficit predicted in February. For the following year, the Treasury projects a deficit of 4.6% of GDP and 4.2% for the subsequent year, both also wider than earlier forecasts.

South Africa’s gross debt is expected to rise to 6.52 trillion rand by 2026/27, up from 5.24 trillion rand in 2023/24. As a percentage of GDP, gross debt is anticipated to stabilize at 77.7% in 2025/26, compared to the 73.6% projected in February.

The Treasury indicated that the government aims to raise $2.4 billion in 2023/24 through concessional funding to fulfill its foreign-currency obligations.

South Africa is already facing elevated premiums in global bond markets, and compared to the February budget estimates, debt-service costs are projected to increase by 14.1 billion rand to a total of 354.5 billion rand for 2023/24.