Sovereign Analysis /
South Africa

South Africa 2022 Budget: The worst is in the rearview

  • Further improvement in deficit targets, with debt now stabilising 1 year earlier and 3pp lower than November forecast

  • Driven by revenue windfalls, with 55% used to fund temporary spending measures and 45% used to reduce deficit

  • We upgrade from Hold to Buy on local government debt, maintain Hold recommendation for South African hard currency debt

South Africa 2022 Budget: The worst is in the rearview
Tellimer Research
24 February 2022
Published byTellimer Research

South Africa's consolidated budget deficit is now projected to narrow from 5.7% of GDP in 2021/22 (revised down from 7.8% in the MTBPS) to 4.2% of GDP by 2024/25 (from 4.9% in the MTBPS), while the 2022/23 deficit is unchanged at 6% of GDP. This will stabilise public debt at 75.1% of GDP by 2024/25 (excluding contingent liabilities, which reached 18.4% of GDP in 2021/22 and are projected to fall to 17% in 2024/25), which is one year earlier and 3pp lower than projected in the MTBPS.



The improved targets are certainly a welcome development, but are largely from revenue windfalls induced by high commodity prices. Main budget revenue is projected to improve by ZAR470bn from 2021/22 to 2023/24 relative to 2021 Budget estimates and ZAR220bn relative to the upwardly-revised Medium Term Budget Policy Statement (MTBPS) in November. Of this, 55% (ZAR258bn) will be allocated to urgent spending priorities and the remaining 45% (ZAR212bn) will be used to reduce the deficit.

The economic outlook remains weak despite the more favourable budget, with real GDP growth projected to average 1.8% over the next three years after expanding 4.8% in 2021 (down from 5.1% in the MTBPS) and significant scarring from the pandemic (with 2.1 million fewer jobs in Q3 21 versus Q4 19). Without significant structural reforms, South Africa will fall short of its goal of more than doubling investment by 2030 and growth will remain stagnant in per capita terms.


In this regard, yesterday’s budget reiterated many of the reforms outlined in last week’s State of the Nation Address (SONA), in which President Ramaphosa highlighted measures such as reduced red tape for business, more efficient ports, opening access to freight rail lines to private operators, auctioning broadband spectrum, and easing visa requirements for skilled workers. However, many of these are simply a reiteration of previous promises, and will be difficult to deliver heading into party elections later this year.

There are also ample risks to South Africa’s fiscal consolidation efforts, including above-target wage increases, the possible extension of increased social grants on a permanent basis, implementation of a national health insurance scheme, and increased support to state-owned enterprises (SOEs). While Finance Minister Godongwana has promised to offset any additional spending with new revenue measures or reallocation of spending, risks to the budget targets are definitely skewed to the downside.  

The downside risks are highlighted by the IMF in their Article IV released earlier this month, which expects the budget deficit to remain above 7% of GDP over the medium-term and public debt to keep rising above 85% of GDP by 2025/26. To reverse the upward debt trajectory, the IMF estimates that the fiscal deficit will need to decline by 6% of GDP over the next three years (including a permanent adjustment of 4.5% of GDP and 1.5% of GDP from increased tax buoyancy and lower interest payments).

Overall, we think the 2022 Budget is largely a commendable effort to set debt on a sustainable path and shift the composition of spending in a more pro-growth direction, even if it is short of detail on structural reforms and a strategy to deal with struggling SOEs. However, the budget targets will be difficult to achieve, and must be accompanied by a holistic reform strategy to lock in the recent improvements and sustainably boost growth over the medium-term.

In the report that follows, we take a deeper dive into South Africa’s 2022 Budget and discuss implications for asset prices.


High commodity prices have led to a substantial upward revision to South Africa’s tax revenue in the current fiscal year, pushing it up by ZAR62bn relative to the November MTBPS (and ZAR182bn relative to last year’s Budget). The National Treasury (NT) has also revised up its tax revenue projections over the medium-term, rising by ZAR71bn relative to the MTBPS (ZAR141bn relative to the 2021 Budget) in 2022/23, ZAR86bn (ZAR146bn) in 2023/24, and ZAR92bn in 2024/25.

Revised gross tax revenue projections (ZAR bn)

Given South Africa’s relatively high tax/GDP ratio (at 24.7% of GDP in 2021/22, it already exceeds the previous high of 23.8% of GDP in 2007/08 and 2019/20) and weak growth prospects, South Africa’s fiscal consolidation will be driven entirely by spending cuts (with consolidated revenue falling by 0.2% of GDP from 2021/22 to 2024/25 and consolidated spending falling by 1.7% of GDP, resulting in a 1.5pp reduction of the deficit).

Fiscal framework

Indeed, the revenue windfalls will be used partially to provide ZAR5.2bn of tax relief in 2022/23, mainly by not adjusting the general fuel and Road Accident Fund levies (ZAR3.5bn of relief), expanding the employment tax incentive (ZAR2.2bn of relief), reducing the corporate income tax from 28% to 27% as announced in the 2021 Budget (ZAR2.6bn of relief, offset with a ZAR2.6bn reduction of tax loss assessments and write-offs), and expansion of the employment tax incentive (ZAR2.2bn of relief). This will be offset in part by increased excise taxes on alcohol and tobacco (ZAR0.5bn tax increase).

Importantly, the NT has highlighted that improved revenue performance is not a reflection of greater capacity to generate revenue, but rather simply a reflection of higher commodity prices. As such, it has not planned any permanent expenditure increases on the basis of higher revenue, and any future increases to permanent spending must be financed in a budget-neutral way (ie increased taxes or reprioritisation of spending). This also poses a risk to the NT’s upwardly-revised revenue forecasts if commodity prices were to decline relative to current projections.


While the NT was careful to avoid any “permanent” spending increases in the 2022 Budget, it has made additional allocations of ZAR111bn in 2022/23, ZAR60bn in 2023/24, and ZAR57bn in 2024/25 to fund several priorities that could not be funded through reprioritization. For 2022/23, this includes ZAR44bn for the 12-month extension of the Covid-19 social relief of distress grant (as announced in the SONA), ZAR20.5bn to accommodate increased wage allowances (as stipulated in the 2021 wage agreement, which will be carried forward by a year without a new agreement), ZAR8bn for the continuation of the National Student Financial Aid Scheme (proposed by ex-President Zuma in 2017 and now a more or less permanent feature of the budget), and ZAR9bn for the continuation of the presidential employment initiative.

Spending pressures

Consolidated spending is projected to grow by just 3.2% on average from 2021/22 to 2024/25, compared with 8.6% since the GFC, helping to reduce spending from 33.2% of GDP in 2021/22 to 31.5% in 2024/25. The bulk of the decline will come from reduced wages, with compensation rising by just 1.8% annually. On the other end of the spectrum, capex will rise by 12.2% annually and debt service costs will rise by 10.7% (rising to 5.1% of GDP and eating up 20% of revenue on average, eroding space for further pro-growth spending). The NT has also budgeted an “unallocated reserve” of ZAR55bn from 2023/24 to 2024/25 to accommodate future unanticipated spending needs.

Spending growth

While the budget pushes spending in a pro-growth direction and commendably resists using revenue windfalls for more “permanent” spending increases, there is a risk that many of the “temporary” spending measures become permanent. Wages are the biggest risk, with the NT already being forced to carry forward the ZAR20.5bn wage increase that resulted from allowances in the 2021 Budget by an additional year. With a new round of collective bargaining set to begin in March 2022, the NT will struggle to keep wage growth below 1.8% (which is negative in real terms and will be staunchly resisted by unions). While the NT has promised to implement headcount cuts if wage increases exceed the ceiling, this too will be difficult to administer and will likely result in slippage in the years to come.

There is also a risk that the Covid-19 social relief of distress grant, which provides monthly cash handouts to 10.3 million people at an annual cost of ZAR44bn and has been extended through the end of 2022/23, will become permanent in the form of the oft-debated Basic Income Grant (BIG). President Ramaphosa emphasised in the SONA that “any future support must pass the test of affordability, and must not come at the expense of basic services or at the risk of unsustainable spending.” However, it will become increasingly difficult to roll back grants as the 2024 elections approach, and social grants will likely be subject to further extensions in one form or another. Lastly, still-nascent proposals to launch a National Health Insurance scheme could add pressure to spending over the medium-term.


One of the key reforms that can be dealt with in the context of the budget is the rationalisation of South Africa’s struggling SOEs, which have been a major drag on the budget over the past decade (with transfers of 1% of GDP to Eskom alone in each of the past two fiscal years). Encouragingly, the 2022 Budget makes no further provisions for SOE support, while Minister Godongwana noted that certain SOEs will be “rationalised or consolidated” and that the NT will formulate criteria for government funding of SOEs in the upcoming financial year. That said, the budget is also striking for the lack of specific measures, once again failing to inspire much confidence that the SOE problem will be addressed head-on. 

Reform at Eskom is the highest priority, with loadshedding reaching a record high in 2021. However, progress so far has been limited, with Eskom missing its December 2021 deadline to legally separate its transmission unit. The delay is partly driven by the failure to gain approval from its lenders, which have appointed a financial advisor to facilitate discussions on the restructuring. There has been speculation that the government is considering taking over part or all of Eskom’s ZAR392bn debt stock, but in the meantime, Eskom has said that all of its existing debt will remain on its balance sheet when the transmission unit is spun off. Plans to partially privatise South African Airways also face delays.


The other key reform area that could be addressed in the budget is measures to boost investment, which has fallen sharply since the GFC and averaged just 17% of GDP from 2010-20 (11.2% private, 5.8% public) versus the National Development Plan (NDP) target of 30% of GDP. To reach this goal, both public and private investment need to be more than doubled between 2020 and 2030 (from 3.9% of GDP to 10% of GDP for public and from 9.8% of GDP to 20% of GDP for private), which will be a tall task in the context of a rising public debt service burden and weak private sector confidence. The 2022 Budget highlights a public infrastructure pipeline of ZAR813bn from 2022/23 to 2024/25 and focuses on increasing the use of Public-Private Partnerships (PPPs) in infrastructure delivery, both of which are encouraging first steps. However, these priorities have long been discussed with little to show for the government’s efforts, and it remains to be seen if this budget is any better at unleashing investment.

Asset implications

The improved fiscal outlook should be broadly supportive of South African assets, with borrowing requirements revised down by ZAR136bn in 2021/22, ZAR78bn in 2022/23, and ZAR54bn in 2023/24 (though still expected to increase over the next three years, relative to the current fiscal year). The bulk of the government’s borrowing requirements (c80%) will be funded by domestic government debt, and borrowing will also be reduced by the planned drawdown of cash reserves. Meanwhile, a US$3bn eurobond issuance is planned before the end of the current fiscal year to cover external obligations, while a floating rate bond and domestic rand-denominated sukuk are also on the table.


South African local government debt has outperformed notably this year, with the Bloomberg South Africa Local Currency Total Return index returning 9% ytd versus 0.5% for the EM aggregate. This has been driven by a 5.4% appreciation of the ZAR on the back of favourable terms of trade developments and a slight reduction of the 10-year yield from 9.8% to 9.65%. With inflation of 5.7% in January (and projected to average 4.8% this year), South Africa’s real 10-year yield of 4% is among the most attractive in the EM space.

Local yields

While the IMF sees the ZAR as being modestly overvalued (c5% at the end of 2021) and the current account surplus is projected to narrow from 3.8% to 0.3% in 2022 (NT estimates), local government debt offers relatively attractive returns as long as commodity prices remain high. In the near-term, the trade will also be supported by the more favourable fiscal outlook laid out in yesterday’s budget and a less hawkish hiking cycle than currently implied by markets (which will result in a bear flattening as short-end yields rise while longer-term yields remain stable).

As such, we upgrade from Hold to Buy on local government debt at a mid-YTM of 9.65% for the SAGB 8 1/4 03/31/32s as of cob on 23 February.

Meanwhile, hard currency debt has so far performed broadly in line with markets year-to-date (with the EMBI South Africa index falling 4.7% in total return terms versus a 4.9% drop for the EMBI Global). Barring more significant progress on the structural reform front, we think South Africa’s weak growth outlook and downside risks to its fiscal consolidation plans over the medium-term will continue to weigh on South Africa’s hard currency assets.

As such, we maintain our Hold recommendation for South African hard currency debt at a spread of 386bps for the EMBI South Africa index as of cob on 22 February. 


Key takeaways

Yesterday’s budget, the first for Finance Minister Godongwana, was the most encouraging in recent memory. Revenue windfalls have contributed to a marked improvement in South Africa’s fiscal position relative to last year’s budget and put South Africa on much firmer fiscal footing. About 55% of these windfalls were used to fund temporary spending measures, with the rest used to lower the deficit. And encouragingly, consolidation plans are based largely on expenditure cuts and a shift away from overblown items like wages towards pro-growth items like capex.

That said, there are significant risks to South Africa’s consolidation plans, stemming from uncertainty over the continuation of high commodity prices on the revenue side to likely overshooting on the wage bill, social grants, and SOE support on the expenditure side. While the NT plans to accommodate any additional spending via new revenue measures or reprioritising of spending and to introduce a more robust fiscal anchor within the next three years to keep debt on a sustainable path, we still think slippage is likely over the medium term.

While the budget strikes a more market-friendly tone than those of the past, it once again reads more like a wish list on the structural reform front and fails to provide concrete plans to set growth on a sustainably positive trajectory. It also fails to provide significant detail on how to deal with South Africa’s struggling SOEs, which will likely continue to be a drag on the budget and growth. Heading into the ANC’s elective conference in December and national elections in 2024, we think reforms will be difficult to deliver and that South Africa’s economic outlook will, therefore, remain dim.

Overall, the 2022 Budget is a commendable continuation of the work started under previous Finance Minister Tito Mboweni to set debt on a more sustainable path, and will provide marginal support to South African assets in the near-term. However, significant follow-through efforts will be required to ensure that the revised targets are achievable, with spending pressures likely to emerge over the medium term and to test the NT’s resolve.

While the worst of South Africa’s fiscal crisis now appears to be in the rearview, the margin for error will, as always, remain incredibly slim amid a ballooning debt service bill and still-rising debt stock. With relatively positive consolidation plans on paper, it is now up to the NT to put these plans into practice, which will be no easy task.

Related reading

South Africa’s road to 2024 elections: Long-term macro outlook remains weak, January 2022

South African Reserve Bank follows the trend with a 25bps hike, November 2021

South Africa budget strikes right tone, but delivery will be challenging, November 2021

South Africa: Cabinet reshuffle creates fiscal uncertainty, August 2021

The stark inequality behind South Africa’s riots, July 2021

South Africa: Reforms show first sign of life, June 2021

South African Reserve Bank holds rate; bias towards stable rates in 2021, May 2021

Our discussion with the South African Reserve Bank – inflation concern overblown, April 2021

South African budget surprises positively but lacks substance, February 2021