Budget 2024: Godongwana could dip into SA’s foreign currency reserves

Finance Minister Enoch Godongwana. File Picture: Timothy Bernard / Independent Newspapers

Finance Minister Enoch Godongwana. File Picture: Timothy Bernard / Independent Newspapers

Published Feb 19, 2024


Economists have warned that Finance Minister Enoch Godongwana might have to dip into the country’s foreign currency reserves - amounting in total to around R500 billion - to raise additional revenue to shore up the fiscus instead of tax hikes.

Market participants have raised the option of using the unrealised gains from the revaluation of gold and foreign exchanges to either cover redemptions on maturing government debt or to finance government expenditure.

This comes as Godongwana this week will table the 2024 Budget Review in Parliament amidst a pivotal election cycle, possibly the most significant since South Africa’s democratic elections in 1994.

Current fiscal indicators show gross tax revenue falling short by an estimated R55bn to R60bn compared to projections outlined in the 2023 Budget Review.

PwC South Africa last week projected that Godongwana could possibly announce an increase of 0.5% in the value-added tax (VAT), taking it to 15.5% in a bid to raise R15bn to finance the extension of social welfare, as personal income tax is stretched to the limit.

But some analysts do not expect a VAT increase because it is an election year, which would leave the income side of the budget quite static.

Personal income tax has been resilient but corporate income tax revenue has decreased by 14.2% year-on-year primarily due to reduced mineral sales in the mining sector, influenced by weak global demand, low commodity prices, and challenges in port and rail infrastructure affecting mineral exports.

FNB senior economist Siphamandla Mkhwanazi on Friday reiterated that the fiscal deficit was expected to remain wide at around 5.0% of gross domestic product (GDP) as a result of expenditure pressures stemming from public sector wages and debt servicing costs.

Additionally, Mkhwanazi said significant debt redemptions and ongoing Eskom debt relief efforts will contribute to a high borrowing requirement, posing risks to debt stabilisation.

“Against the backdrop of weak fiscal climate and subdued growth prospects, there’s a heightened possibility that the government may tap into the accumulated funds, approximately R500 billion, in the South African Reserve Bank’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA),” Mkhwanazi said.

“The critical question remains the extent to which these funds will be utilised and for what purposes.”

With revenue likely to be less than estimated in November and spending more, economists said the picture should be worse than the debt peaking at 77.7% of GDP in 2025/26 and then very slowly taper off.

Economists at the Bureau for Economic Research (BER) on Friday also said they suspected that there could be an announcement on using the GFECRA to offset tax hikes to raise the additional R15bn.

“Without going into all the technical details, a prudent approach to using some of the funding – for example paying off some foreign debt – coupled with clear guidelines on how the funds could be used going forward might actually be welcomed by the markets,” BER said.

“While you could ‘get there’ by lifting the VAT rate or pushing up corporate or personal tax rates, we think this is unlikely to happen this year for a variety of reasons. It will likely be achieved by bracket creep and the hope of increased efficiency in tax collection.”

It is estimated that bracket creep could increase tax take by between R15bn to R20bn, which will cover a few holes.

However, dipping into the GFECRA does not come at no cost to the country’s fiscal metrics though it could help to either reduce the government’s budget deficit or alleviate the debt burden.

Momentum Investment economist Sanisha Packirisamy said the amount in the GFECRA changed each year depending on gains and losses due to market movements, and the rand’s strength could see a reversal in the gains of the GFECRA.

“There is a general consensus across market participants that employing funds from the GFECRA should not significantly erode credibility, but this should be viewed as a windfall,” Packirisamy said.

“Leaving a buffer in place is also viewed as necessary to avoid the potential for a negative equity position for the SARB. Moreover, a clear and transparent framework would have to be devised, particularly if GFECRA funds are phased in over time.”

It has not been established, as yet, as to what would be the implications of using the GFECRA on the country’s sovereign credit status though South Africa is currently rated below investment level with a stable outlook by all major ratings agencies.

Citadel’s chief investment officer, George Herman, said the markets would be looking for an announcement on this issue.

“The state’s contingency fund is a complex tool to rebalance the South African Reserve Bank’s balance sheet. If some of our reserves are reduced, sold and monetised, the short-term effect is that it will have a positive impact on the rand as some flows might come into the country; but the negative effect would be that our level of currency reserves will reduce, increasing the fragility of the rand in the medium term,” Herman said.