By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Following the unprecedented Budget postponement in February, attention again turns to Finance Minister Enoch Godongwana as he prepares to deliver the much-anticipated 2025 Budget Review on Wednesday, 12 March. The delay in February appeared to centre around discussions over a potential VAT increase from 15% to 17%, and it remains unclear whether a compromise on a smaller hike has been reached. What is certain, however, is that the budget must carefully navigate economic risks-including fiscal weakness, external volatility, and pressing social needs. Striking this balance requires prioritising pro-growth infrastructure investment, maintaining fiscal discipline to prevent excessive debt accumulation, and ensuring targeted social support without overburdening public finances. In this context, the stability of the Government of National Unity (GNU) and its ability to provide policy continuity will be crucial. If the GNU can maintain coherence in its economic strategy, investor confidence should strengthen, unlocking much-needed capital for growth.
While we do not want to pre-empt the contents of the revised budget, we remain confident that the fiscal framework will stay on its consolidation path.
The weaker-than-expected GDP growth outcome for 2024 (0.6%) may prompt Treasury to adjust its growth projections to reflect a lower starting point. In the initial budget proposal, Treasury had projected GDP growth of 0.8% for 2024, rising to 1.9% in 2025 and averaging 1.8% over the medium term. Our latest forecasts suggest growth will improve from 0.6% in 2024 to 1.7% in 2025 and 1.8% in 2026 (revised down from 1.9% for both years). However, we still expect growth to exceed 2.0% by 2027 as infrastructure reforms gain traction.
Notably, it remains possible for growth to approach 2.0% this year, supported by a benign inflation environment, the prospect of further interest rate cuts, a temporary boost to consumption from two-pot retirement savings withdrawals, private sector inventory restocking, and ongoing reforms in energy and logistics.
What do the year-to-date fiscal numbers look like?
High-frequency budget data suggests that both revenue and spending are broadly in line with Treasury's projections from the 2024 Medium-Term Budget Policy Statement (MTBPS).
The year-to-date performance across other major tax categories has been mixed. Specific excise duties rose by 10.1%, exceeding Treasury's 7.6% projection, while customs duties increased by 8.4%, outperforming the 4.7% forecast. Meanwhile, the fuel levy declined by 8.9%, slightly better than Treasury's projected 9.9% contraction
Overall, gross tax revenue is up 5.8% year-to-date, broadly in line with Treasury's 5.7% growth estimate from the 2024 MTBPS. However, this remains below the 7.6% projection in the 2024 Budget Review, reflecting ongoing economic weakness.
Consistent with the fiscal consolidation strategy, main government expenditure has risen by just 3.3% year-to-date, driven by a modest 2.8% increase in non-interest spending. However, debt-service costs continue to rise above inflation, up 6.0% year-to-date.
Week in review
The Manufacturing PMI for February indicated a continued contraction in the manufacturing sector with a slight decline to 44.7 points from 45.3, marking the fourth consecutive month of subdued activity. The downturn was driven by decreased demand and supply-chain constraints, evidenced by falling sales orders (to 38.7 points from 42) and slower supplier deliveries (to 55 points from 49.9). Meanwhile, employment also contracted, by 2.3 points to 42.2, and remained in contractionary territory for the 11th consecutive month. Rising input costs, influenced by a weaker rand and higher oil prices, further pressured the sector, leading to increased purchasing prices in February. Compounding these challenges, concerns about global trade uncertainties, particularly regarding SA-US relations, and possibly the resurgence of load-shedding contributed to a pessimistic outlook for future business conditions, with the index tracking expected business conditions in six months' time decreasing further by 4.4 points to 60.5 in February.
New vehicle sales posted another strong performance in February, increasing by 7.3% y/y to 47 978 units. This was driven by a 17.0% increase in new passenger car sales to 33 757 units, supported in part by car rental sales, which accounted for 14.6% of the passenger car market. This marks the eighth consecutive month of annual growth in passenger car sales, reflecting modestly improved sentiment, reduced monetary policy restrictiveness, and a wider availability of affordable car options. However, light commercial vehicle sales remained subdued, declining by 11.3% y/y to 11 802 units, partly due to intense competition from affordable SUVs offered by Asian brands. The performance of medium and heavy commercial vehicles was mixed. Medium truck sales rose by nearly 12%, suggesting potential growth in smaller-scale logistics, while heavy truck and bus sales fell sharply by 12.5%, indicating a possible slowdown in larger infrastructure projects or long-haul transport.
Real GDP (not seasonally adjusted) grew by 0.9% y/y in 4Q24, up from an upwardly revised 0.4% (previously 0.3%) in the previous quarter. On a seasonally adjusted (non-annualized) basis, the economy expanded by 0.6% q/q, marking a modest rebound from an upwardly revised 0.1% contraction (previously -0.3%) in 3Q24.
As anticipated, retrospective revisions to 1Q24-3Q24 data were evident in the agriculture, forestry, and fishing GDP. However, even with these adjustments, overall GDP growth remained subdued at 0.6% in 2024, down from 0.7% in 2023, reflecting contractions in six out of ten sectors. The largest decline (-8.0%) was recorded in the drought-affected agriculture, forestry, and fishing sector. Excluding this sector, the economy would have expanded by 0.8% in 2024.
The RMB/BER Business Confidence Index (BCI) flatlined at 45 index points in 1Q25. While the index remains above the long-term average of 43 points and still reflects improvement from the 30 points recorded at the start of 2024, it nevertheless highlights stalled momentum. In fact, all sectors except new vehicle dealers reported a fall in sentiment. Therefore, the surge in new vehicle dealer confidence assisted in upholding overall sentiment. While overall activity is improving, this survey outcome highlights the pressing need for progress on structural reform and policy certainty. This is especially in the context of heightened global policy uncertainty as well as local pressures such as the potential for more disinvestment by large businesses and fiscal consolidation that may require tax measures that will weigh on demand and sentiment.
The current account deficit narrowed again, recording R31.6 billion in 4Q24 from R55.6 billion (previously R70.8 billion) in 3Q24. As a percentage of GDP, the current account deficit was 0.4%, improving from 0.8% (previously 1.0%) in 3Q24. For 2024, the deficit was 0.6% of GDP, down from 1.6% in 2023. The narrowing of the deficit in 4Q24 was on account of a wider trade surplus (goods and services), as the value of exports (volume and price effect) increased more than that of imports (volume effect). The trade surplus doubled from 1.5% of GDP in 2023 to 3.0% in 2024. The services, income, and transfer (SIT) account deficit widened, from R256.1 billion to R264.5 billion (-3.5% of GDP). On an annual basis, the SIT deficit was 3.6% of GDP, from 3.1% in 2023. South Africa's terms of trade improved in 4Q24, reflecting a rise in rand-denominated export prices while the prices of imports fell. The strength in gold prices and other commodities with an improvement in China's economy, versus softer oil prices as supply rises, will be key to the terms of trade outlook. In addition, the unwinding of logistical constraints will be important for export growth. This will be pertinent as rising domestic demand increases the odds of stronger import growth over the medium term.
Electricity production rose by 5.7% y/y in January, accelerating from 3.6% y/y (previously 3.2%) in December. Seasonally-adjusted output lifted by 0.4% m/m after contracting by 1.5% (previously -1.4%). The sector detracted from 4Q24 economic growth and recent generation capacity issues could weigh on the 1Q24 performance. However, disruptions have been short-lived, and should the performance reflected at the start of the year be sustained, the electricity sector could support GDP growth going into 2025.
South Africa's gross foreign exchange reserves amounted to $66.3 billion in February, reflecting an increase from $65.9 billion in January. This largely reflects a $230 million rise in gold reserves to $11.5 billion, supported by a 2.0% increase in the gold price. There was also a $114 million increase in foreign exchange reserves to $45.8 billion and a $44 million rise in special drawing rights (SDRs) to $6.2 billion. Besides the large increase in gold reserves, valuation adjustments contributed to these increases but were partially offset by foreign exchange payments made on behalf of the government.
Week ahead
On Monday, the FNB/BER Building Confidence Index for 1Q25 will be published. Confidence in the building value chain remained unchanged at 40 index points in 4Q24. Notably, main contractors experienced a significant improvement in activity, employment, and profitability, leading to a decade-high confidence level. However, despite the positive momentum, main contractors were still concerned about the short-term outlook due to weak order books and the ongoing impact of the construction mafia. Sub-contractors, on the other hand, faced challenges due to a decline in residential solar installations, leading to decreased confidence. Architects and quantity surveyors experienced some improvement in activity but were hindered by municipal delays and payment issues. Overall, the survey showed a mixed outlook for the building sector.
On Thursday, mining production data for January will be released. In December, mining production contracted by 2.4% y/y after contracting by 0.9% in November. Seasonally adjusted mining output fell sharply by 3.9% m/m after flat growth in November (revised from -0.2% to 0%). The latest GDP data suggests that the mining sector's gross value added (GVA) expanded by 0.3% in 2024, reflecting a mild recovery from a 0.5% contraction in 2023.
Manufacturing production data for January will also be released on Thursday. Manufacturing output declined by 1.2% y/y in December following a 1.9% contraction in November. Seasonally adjusted manufacturing output fell by 2.4%, after declining by 1.3% in November. The manufacturing sector's GVA fell by 0.5% in 2024, after expanding by just 0.3% in 2023, reflecting demand and structural constraints.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 3 Mar | SA | Manufacturing PMI | Feb | 44.7 | 45.3 |
| SA | NAAMSA New Vehicle Sales % y/y | Feb | 7.3 | 11.8 | |
| 4 Mar | SA | GDP % y/y | 4Q | 0.9 | 0.4 |
| SA | GDP Seasonally Adjusted % q/q | 4Q | 0.6 | -0.1 | |
| 5 Mar | SA | BER Business Confidence Index | 1Q | 45.0 | 45.0 |
| 6 Mar | SA | Current Account Balance % of GDP | 4Q | -0.4 | -0.8 |
| SA | Current Account Balance R billion | 4Q | -31.6 | -55.6 | |
| SA | Electricity Production % y/y | Jan | 5.7 | 3.6 | |
| SA | Gross Foreign Reserves $ billion | Feb | 66.3 | 65.9 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 10 Mar | SA | FNB/BER Building Confidence Index | 1Q | -- | 40.0 |
| 12 Mar | SA | National Budget Speech | -- | -- | |
| 13 Mar | SA | Mining production % y/y | Jan | -- | -2.4 |
| SA | Mining production % m/m | Jan | -- | -3.9 | |
| SA | Manufacturing production % y/y | Jan | -- | -1.2 | |
| SA | Manufacturing production % m/m | Jan | -- | -2.4 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 88,260.08 | 1.1% | 3.2% | 20.0% |
| USD/ZAR | 18.13 | -1.8% | -3.3% | -3.7% |
| EUR/ZAR | 19.56 | 1.9% | 0.8% | -4.7% |
| GBP/ZAR | 23.36 | 0.4% | 0.2% | -2.5% |
| Platinum US$/oz. | 970.28 | 2.0% | 0.3% | 6.7% |
| Gold US$/oz. | 2,911.80 | 1.2% | 3.4% | 35.5% |
| Brent US$/barrel | 69.46 | -6.2% | -8.6% | -16.3% |
| SA 10 year bond yield | 9.79 | 0.1% | -0.2% | -10.3% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.6 | 1.7 | 1.8 | 2.1 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.0 | 2.1 | 2.2 | 2.3 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.7 | 1.4 | 2.8 | 3.9 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 4.0 | 4.5 | 4.4 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 5.0 | 4.4 | 4.4 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.5 | 18.3 | 18.4 | 18.6 | 19.0 |
