By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
The National Budget has finally been tabled, exhibiting tight fiscal manoeuvring as confidence and growth hang in the balance. Ultimately, the budget reflected slippage as spending pressures persist, and while tax increases have reduced the spillover to the deficit and borrowing requirement, fiscal policy is looser than previously envisioned. Importantly, this is at a time when monetary policy has gradually become less restrictive on economic activity and is expected to be neutral by the end of the year. Question is, does the fiscal outlook warrant more caution on the monetary front?.
Let us be frank, the fiscal space is extremely tight
There is no doubt that Treasury had, and will continue to have, a tough time balancing the fiscus. The spending risks that have continued to be flagged by analysts, the wage bill for example, have materialised, with many others hanging over the fiscal authority. Treasury opted to choose between higher taxes that could weigh on confidence and growth or higher debt that would weigh on confidence, borrowing costs and growth, while further limiting future fiscal space. It chose the former. It also upheld a tough stance on State Owned Entity finances, particularly Transnet, which may be risky given that service delivery failures will continue to weigh on growth, but it highlights government's commitment to partnering with the private sector and liberalising energy and logistics markets. Also important, is the invitation of private capacity at the local government level. These efforts will drive the crowding-in of private investment while embedding sustainability in service delivery. That said, we are concerned that other spending pressures will not easily be side-stepped. Recapacitating the public service in areas such as defence and education is more than just a headcount story, it involves robust investment in technology and competitiveness. Furthermore, the challenging global environment warrants that countries be more self-sufficient when considering welfare. Not only does South Africa (SA) need to think about the funding gaps that have been created, but likely spillovers from neighbouring countries that are more vulnerable.
Fiscal policy is loosening with implications for monetary policy
As things stand, a higher debt-to-GDP ratio than projected by Treasury at both the 2024 Budget and Medium-Term Budget Statement, places upward pressure on SA's risk premium in the SARB's Quarterly Projection Model mechanism. This, alongside any weakening in confidence, given the risk of further slippage and growth downgrades, will exert pressure on borrowing costs. While we do not believe that this alone will shift real neutral interest rates upwards enough to affect the near-term outlook on the repo rate, monetary policy must still digest the budget in relation to future interest rate cuts.
Is fiscal policy structurally loose?
The upward revisions to the peak in the debt-to-GDP ratio suggest that Treasury has failed to meet that soft target. However, it has managed to record a primary surplus, another fiscal anchor, and expects to grow this surplus over the Medium-Term Expenditure Framework. Furthermore, considering that most spending pressures are aligned with government's remedy and rebuilding efforts, one could argue that the excess spending will not necessarily persist in the long term alongside growth and productivity. Therefore, structural fiscal policy is more aligned with consolidation and creating fiscal buffers. At this stage, it does not appear necessary for monetary policy to counterbalance fiscal policy. Household spending, especially by middle-income groups, may be more constrained than initially anticipated. Inflation, even with the VAT increase, should remain anchored. Growth in the United States may disappoint and allow for additional Fed cuts to be delivered. All these factors suggest that local rates should be reduced by another 50 basis points this year, however, whether the next cut will be delivered next week is a tough call given all the global volatility.
Week in review
The FNB/BER Building Confidence Index registered a marginal increase to 41 points in 1Q25 from 40 points previously, reflecting a largely stable but persistently subdued sentiment within the building sector. Subsector performance was mixed: hardware retailers, quantity surveyors, and building subcontractors reported higher confidence in 1Q, while main contractors, architects, and building material manufacturers experienced declines. Despite a contraction in current main contractor activity, optimism regarding near-term prospects remains, corroborated by increased architect activity indicative of potential future demand. However, concerns regarding municipal inefficiencies and the potential for unfulfilled expectations pose risks to the near-term outlook.
Mining production (not seasonally adjusted) contracted by 2.7% y/y in January, following a 2.4% y/y decline in December. This was driven by a sharp 15.1% y/y contraction in iron ore production, a 4.4% decline in coal, a 3.8% decline in platinum group metals, and a marginal 0.6% decline in chromium ore. The remaining eight mining divisions posted growth, in some cases even double-digit increases. However, their relatively small contribution to overall mining output meant that their growth was insufficient to offset the declines in other divisions. Seasonally adjusted output fell by 1.2% m/m, reflecting continued weakness after a 3.7% contraction in December. Mining output grew by 0.3% in 2024 after contracting by 0.5% in 2023, and we believe there is scope for further modest growth this year as the global economy stabilises and domestic supply-side reforms help to ease bottlenecks.
Manufacturing production (not seasonally adjusted) contracted by 3.3% y/y in January, following a 1.2% y/y decline in December 2024. This weak start to 2025 is consistent with our downwardly revised GDP growth outlook (to 1.7% from 1.9% this year) and suggests that the manufacturing sector is not out of the woods yet. Seasonally adjusted manufacturing output increased slightly by 0.2% m/m, but this was insufficient to offset the 2.2% decline recorded in the previous month. The Manufacturing PMI Business Activity Index (a proxy for output) remains below the neutral 50 mark, indicating that activity in the sector remains constrained. Nevertheless, the expected business conditions index stands at 60.5 points, suggesting that manufacturers are modestly optimistic about operating conditions in the near term. After contracting by 0.5% in 2024 and weighing on overall GDP growth, we expect a modest recovery of nearly 1.0% in manufacturing activity, supported by improving domestic demand, including fixed investment, as well as easing supply-side constraints.
Week ahead
On Monday, the BER inflation expectations survey results for 1Q25 will be published. Inflation expectations for 4Q24 fell by 0.5ppts to 4.6% for 2024 and by 0.3ppts to 4.5% for 2025. Meanwhile, 2026 and five-year-ahead expectations fell by 0.2ppts to 4.6%. As headline inflation remains soft, we should see further slowing in backward-looking expectations.
On Wednesday, data on consumer inflation for February will be released. Headline inflation was 3.2% y/y in January, up from 3.0% in December. Monthly pressure was 0.3%, led by contributions from core and food inflation. In February, we see inflation rising to 3.3%. Inflation should remain subdued in 1H25 before rising steadily into the second half of the year. This will be mainly on account of fading positive base effects and some improvement in demand. Nevertheless, we currently anticipate that average inflation will be softer than in 2024, recording a figure closer to 4%.
Also on Wednesday, data on retail sales for January will be released. Retail sales growth moderated to 3.1% y/y in December, following a robust 7.6% increase in November. Overall, retail sales grew by 2.5% in 2024, rebounding from a 1.2% decline in 2023 and a 1.6% increase in 2022. While the impact of the two-pot pension withdrawal system is expected to diminish over time, we anticipate continued positive spending momentum into 2025.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 10 Mar | SA | FNB/BER Building Confidence Index | 1Q | 41.0 | 40.0 |
| 13 Mar | SA | Mining production % y/y | Jan | -2.7 | -2.4 |
| SA | Mining production % m/m | Jan | -1.2 | -3.7 | |
| SA | Manufacturing production % y/y | Jan | -3.3 | -1.2 | |
| SA | Manufacturing production % m/m | Jan | 0.2 | -2.2 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 17 Mar | SA | BER inflation expectations survey | 1Q | -- | 4.6 |
| 19 Mar | SA | CPI % y/y | Feb | -- | 3.2 |
| SA | CPI % m/m | Feb | -- | 0.3 | |
| SA | Core CPI % y/y | Feb | -- | 3.5 | |
| SA | Core CPI % m/m | Feb | -- | 0.2 | |
| 19 Mar | SA | Retail sales % y/y | Jan | -- | 3.1 |
| SA | Retail sales % m/m | Jan | -- | -0.1 | |
| 20 Mar | SA | SARB interest rate announcement | Mar | 7.25 | 7.50 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 87,067.75 | -1.40% | -0.90% | 17.20% |
| USD/ZAR | 18.33 | 1.10% | -0.90% | -1.30% |
| EUR/ZAR | 19.91 | 1.80% | 2.90% | -2.10% |
| GBP/ZAR | 23.75 | 1.70% | 2.20% | -0.10% |
| Platinum US$/oz. | 999.62 | 3.00% | -0.10% | 6.10% |
| Gold US$/oz. | 2,989.18 | 2.70% | 2.10% | 37.50% |
| Brent US$/barrel | 69.88 | 0.60% | -6.90% | -16.80% |
| SA 10 year bond yield | 9.81 | 0.20% | -0.50% | -11.10% |
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 |
