On 23 February 2022, the Finance Minister Mr. Enoch Godongwana will deliver his national budget speech. This speech comes at a difficult time for SA, with the COVID-19 pandemic putting substantial strain on an already ailing economy, mounting debt, as well as rising unemployment.
The South African Economy remains sluggish with forecasted economic recovery to be below pre-COVID levels from which the country was already experiencing weak economic growth. The restrained outlook for 2022 is informed by a contraction in real GDP of 1.5% in the third quarter of 2021, amongst other factors.
Against this backdrop, in his maiden annual budget speech, BEPA expects the Minister of Finance, the Honorable Mr. Enoch Godongwana to mobilize the fiscus around addressing key challenges hampering the economic recovery of the country. These include worsening fiscal performance, load shedding and ease of doing business.
Fiscal Debt and Balance of Payments
Fiscal debt together with the balance of payments is trending worryingly in an unsustainable direction. Debt to GDP is likely to breach 70% in 2022 and the fiscal deficit is to hold firm around 10% of GDP compared to a 1% surplus in the mid-2000’s. As the ongoing economic damage wrought by the coronavirus pandemic compounds a deterioration in public finances caused by years of overspending, mismanagement, and alleged graft, rising debt and debt-service costs, the fastest growing expenditure line item in the budget since 2011, are key risks to South Africa’s fiscal sustainability. The negative trend in these indicators emphasizes the uncertain environment the energy sector finds itself in, as the government is running out of fiscal room to pursue its transition to a low carbon economy and reduced unemployment.
BEPA expects the Minister to stabilize the fiscus and reign in wasteful and irregular expenditure through a tough stance on the continued misuse of public funds. One of the ways this can be done is by allocating significant funding to recapacitate State Institutions that are to pursue prosecution of alleged State Capture actors as announced by the President of South Africa, the Honorable Mr. Cyril Ramaphosa in his 2022 SONA. A fiscal debt reduction plan must be put in place focused on decreasing the public sector wage bill, consolidation of SOE’s to a manageable number and a moratorium on bailouts for failing municipalities and government departments without clear turnaround plans.
Over the last two decades, Eskom’s Energy Availability Factor has seen a steep decline from over 90% to 65%. The country now has an electricity supply shortfall of over 5 000MW, coupled with an increase in the average age of its power stations to 35 years. With over 30% of Eskom’s generation capacity to be retired by 2031, The Minister has to act decisively in this budget on electricity sector reform that will move the country towards a lower carbon economy, create green jobs and urgently increase generation capacity. Reform levers that could be pulled to resolve load shedding within this decade include generous tax subsidies for private electricity generation and electric vehicles, streamlining funding towards the CEF attached to measurable governance KPI’s and tax-free structures for oil and gas exploration to enable a market-driven electricity sector dominated by private sector actors.
Our members are concerned that the era of coalition governments in South Africa will result in acute policy inertia and absent public service delivery. The ideological differences amongst political actors is the biggest constraint to ratify much need reforms in the energy sector at a policy, regulation and governance level.
We would like to see a budget that is geared towards support for local governance focused on professionalizing the public service, autonomy in decision making – specifically around procuring power from the private sector and incentivizing fiscal prudence.
Government remains far off its vaccination rate target of 70%. This is likely to result in COVID restrictions that will be imposed deep into early 2023. This uncertainty in the lifting of restrictions is forecasted to slow down economic activity including key supply chains in the energy sector.
BEPA encourages the Minister to detail spend that will resource vaccination sites across the country and fund education campaigns on the benefits of inoculation on the country’s economic activity to ordinary South Africans. Lower middle-income countries with high vaccination rates or less COVID restrictions are predicted by the IMF to have a GDP per capita recovery rate averaging 1.67% higher than those that do not.
Ease of Doing Business
The World Bank ranks South Africa’s ease of doing business at 84 out of 190 countries globally across performance indicators such as electricity supply, obtaining construction permits, tax regulation and the cost of labour. By comparison, Chile – which has a similar economic structure to South Africa, became the first country to transition from a middle to high income OECD country in the last two decades.
To emulate Chile’s economic miracle in alignment with the President’s 2022 SONA address, BEPA would like to see a business-friendly budget. The budget must include spend allocations that will accelerate electricity sector reform, downward revision of the minimum wage and sign-off on bankable public infrastructure projects. This will stimulate investment in the energy sector across the value chains of private electricity generation, natural gas exploration and production (E&P), oil refining capacity and electric vehicles.
We look forward to the Minister’s address and hope he takes on our suggestions as an indication of the renewed direction the government has embarked upon in alignment with the President’s 2022 SONA.
By Nkosinathi Hlophe CA (SA), M. Inst. D.
On behalf of BEPA and its Members
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