Finance Minister, Enoch Godongwana, tabled the 2024/2025 budget on Wednesday, 21 February 2024 at 14:00 (SA Time) in Cape Town.  The budget was delivered on the back of a daunting combination of socioeconomic and fiscal challenges confronting South Africa, including a low sovereign credit risk rating.

The main highlight of the budget speech was on the use of the gold foreign exchange contingency reserve account (GFECRA) to alleviate South Africa’s borrowing requirement over the next three years. The South African Reserve Bank (SARB) and the National Treasury reached an agreement to utilise R150 billion of the unrealised gains of the R500 billion GFECRA balance.

The rand and the bond market responded positively to this announcement and its impact on reigning in debt as a percentage of GDP. Nonetheless, withdrawals from this account without legislation in place to ensure that it is accessed and used pragmatically in the future can leave the economy in a peculiar state, more so if the funds are not channeled towards growth seeking initiatives.

Over 60 percent of government spending is for social welfare, which is difficult to reduce, particularly during election years. To this end, social spending was adjusted in line with inflation, where non-interest spending was increased by R18 billion per year on average over the next three years.

Despite growing pressures to hike taxes to balance the government’s books, value-added tax, the fuel, and road accident fund levy were left unchanged for a third year in a row. This will result in a tax relief of circa R4 billion for the cash-strapped South African consumer. We consider this fiscal stance additionally supportive in containing future increases in transport inflation.

The National Treasury now expects the consolidated budget deficit to narrow from 4.9 percent of GDP in the last fiscal year, to 3.3 percent of GDP over the next three years. At this point it is uncertain if this marks a shift toward a consistently lower budget deficit for South Africa in the future. Should this scenario play out, we expect a narrower budget deficit to result in decreased long-term interest rates, driven by a reduction in the risk premium that investors require for holding South African government bonds.

While the budget was both fiscally prudent and cognizant of the economic challenges, domestic constraints, including insufficient energy, poor rail, ports and water infrastructure, safety and security, and educational outcomes, among other issues, remain far from being resolved.

Investment implications

The budget speech does not alter our inflation, interest rate and fund positioning over the short term. Our cash and income funds maintain a bias towards floating rate instruments, thereby immunising our portfolios against interest rate fluctuations. This strategy helps us sustain a steady level of outperformance relative to benchmarks across different measurement periods.

Given that we expect the SARB to start cutting its benchmark policy rate later this year, we are gradually expanding our asset allocation to include fixed rate instruments, while staying within the acceptable duration limits. In addition, we continue to look for opportunities to boost our client’s fund yield by leveraging our size, liquidity, term, and credit risk premiums, while simultaneously funding issuers at wholesale lending rates.