South Africa’s Reality Check: National Treasury’s Candid Economic Outlook in the Medium-Term Budget Policy Statement

Understanding What It Means for Businesses and Investments

South Africa’s latest Medium-Term Budget Policy Statement (MTBPS) delivered by Finance Minister Enoch Godongwana brought a sobering perspective on the nation’s economic trajectory. While it embraced realism and transparency, it tempered the optimism many held following the establishment of a Government of National Unity (GNU) earlier this year.

A Realistic Economic Forecast

The Minister’s speech addressed several key pillars for potential growth: stabilizing the economy, implementing structural reforms, enhancing state capability, and prioritizing infrastructure repair. However, these objectives are far from simple to achieve. With a revised economic growth projection averaging just 1.8% annually over the next three years, it’s clear that South Africa faces formidable challenges on its path to recovery.

The economic reality revealed by Godongwana led to an initial market reaction with drops in bonds, equities, and the rand, though stability returned soon after. It’s a reminder of how delicately poised South Africa’s economic landscape remains.

Rising Debt and Budget Adjustments

Just months after the February National Budget, Treasury has had to adjust its expectations downward on GDP growth while reporting shortfalls in tax revenue and increases in debt and budget deficits. Among the top concerns are unsustainable debt servicing costs, with 22% of revenue directed solely to servicing the national debt. Public sector spending remains high, with the government’s wage bill comprising 14% of GDP—well above the OECD average of 10%. Plans to address this include encouraging early retirement for government employees, although this has a steep initial cost of R11 billion.

State-owned enterprises (SOEs) are another area of concern, with additional support required for entities like Sanral, which will need R13.3 billion over the next two years. Local governments, in turn, are being held accountable to repay their debts to critical service providers like water boards and Eskom.

While there’s a push to direct funds toward infrastructure, much of this investment will go toward repairing existing networks in electricity, water, sanitation, and transport rather than toward building new infrastructure.

Addressing South Africa’s Greylisting Status

The MTBPS also highlighted progress toward South Africa’s removal from the Financial Action Task Force (FATF) greylist. Godongwana noted that 16 of 22 recommendations have been met, yet challenges remain with demonstrating “sustainable action” in combating money laundering and terrorist financing. This includes prosecuting and sanctioning offenders—an ongoing requirement for full compliance.

The greylisting has tangible financial implications, especially for businesses with offshore assets or those engaged in cross-border transactions. Additional costs and compliance requirements will persist until South Africa exits the list, likely delaying removal until at least the next FATF review in February 2025.

Another significant hurdle lies in Beneficial Ownership Registers (BORs) for trusts, which the FATF requires to be submitted to the Master of the High Court. The current compliance level is low, especially among smaller or family-owned trusts, with sanctions or deregistrations likely if compliance isn’t met by the November 2024 deadline.

Corporate Tax and Global Minimum Tax Bill

Despite falling short of tax collection goals by R22 billion, the MTBPS did not propose new tax reforms. However, the introduction of the Global Minimum Tax Bill aligns South Africa with the OECD’s aim of a 15% minimum corporate tax rate across participating countries. This development could play a vital role in securing fair tax contributions from multinational corporations, ensuring they contribute equitably to the local economy regardless of where they operate.

Broader Implications and the Global Outlook

Minister Godongwana underscored that South Africa’s economic future is increasingly tied to the global environment. Geopolitical instability could dampen growth prospects further, potentially leaving the country’s growth below 2% for the foreseeable future.

What This Means for Businesses and Investors

The MTBPS brings to light the significant fiscal challenges facing South Africa, reminding us that realistic and sustainable planning is essential. Businesses, investors, and individuals managing offshore assets should prepare for the extended costs and compliance requirements stemming from the FATF greylisting. Meanwhile, multinational corporations may need to adjust to the impending global minimum tax regulations.

To stay informed and compliant, expert financial and tax advisory services are indispensable. Our firm is committed to guiding clients through these complex developments, helping them navigate South Africa’s dynamic tax and regulatory landscape with confidence. Reach out to us today to ensure your business remains resilient and well-prepared in an uncertain economic climate.