Africa’s budget suffers from commodity slowdown
Africa’s budget is heavily dependent on mining. Changes in this sector are putting pressure on the fiscal stability of most countries on the continent. The situation is similar in South Africa, where a budget deficit has emerged. This is due to weak tax revenues from the extractive sector.
The consolidated budget deficit will narrow to 5% of GDP in the 2024 financial year. This is 0.4% lower than previously estimated by the National Treasury. Under these circumstances, the central bank will not cut interest rates, affecting the country’s domestic market.
As for the outlook, analysts expect that:
– the budget deficit will fall to 4.6 percent of GDP in 2025;
– in 2026, they forecast a reduction to 4.2% of GDP.
The analysts base this on mining revenues. According to Isaac Matshego of Nedbank, 2022 was a very good year for South Africa. That was when the authorities raised taxes significantly, coinciding with higher commodity prices. But by 2023, the value of coal on the world market had fallen sharply. The country also had to reduce exports.
Economy forecast
Nedbank experts believe the budget deficit will reach 5.3% of GDP. Their forecasts are lower than those of the National Treasury. In addition, the analysts believe that the country’s debt-to-GDP ratio will increase in the current period. This ratio will be around 76.6% of GDP and reach 78% in the next 3 years.
South Africa’s economy will grow by 1.1% in 2024. This is 0.1% lower than previous forecasts. Such trends point to constraints on tax rate increases. Nor should we expect any dramatic changes in central bank policy. The South African regulator will not consider cutting interest rates until at least Q3. Analysts believe a cut of 50 basis points to 7.75% is possible. However, many factors that are difficult to predict accurately will influence this decision.
David Omojomolo of Capital Economics hopes the economy will grow this year. In the previous period, South Africa faced port problems and electricity shortages. By early 2024, the situation has improved significantly. Freight transport and power consumption have become more manageable. Fiscal policy is unlikely to change before the election. It is also possible that interest rates will gradually decrease, which will have a positive impact on the country’s economy.
