Compiled and edited by Sharyn Macnamara

The first fiscal policy statement since the formation of the Government of National Unity (GNU) in June 2024 was tabled yesterday, 30 October 2024. African Mining, incorporating Mining Mirror highlights some of the insights and their relevance for the mining sector shared by the Minerals Council South Africa and Banking Association South Africa.

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The Minerals Council South Africa noted that compared to the projections in the February 2024 Budget, the somewhat more optimistic real GDP growth forecasts that informed the public finance ratios presented in the Medium-Term Budget Policy Statement (MTBPS) were welcomed. After a subdued 1.1%1 in 2024, this sees real GDP growth in South Africa averaging 1.8% between 2025 and 2027, somewhat higher than the IMF’s latest projection for average medium-term growth of 1.5% in South Africa. African Mining notes that although this an indication of the beginings of an upward trend, compared to the global average last year of around 3.2%, there is much work to be done.2

The MTBPS highlighted that the slightly higher growth forecast is a function of improved power supply and better business, consumer and investor confidence tied to the GNU. Importantly, to ensure sustainable public finances, growth needs to improve to well beyond 2% on a sustained basis. For this to materialise, non-energy growth constraints and structural reforms must be tackled with vigour.

 

Risks to the mining sector

Minerals Council said this of particular relevance to the mining sector was the fact that the MTBPS noted that the poor Transnet rail and port performance, regulatory bottlenecks and crime are offsetting the mining sector’s gains from improved electricity supply. This explains why mining production remains below the pre-COVID-19 level.

Added to the risks facing the mining sector and the economy more broadly is Eskom’s application for an untenable electricity price increase of more than 36% in 2025. In its modelling, National Treasury has a much lower assumption for the increase in the CPI electricity component of 12.3% in 2025. This highlights risks to inflation (on the upside) and growth (on the downside) if Eskom’s tariff application is approved, said the Minerals Council.

On the regulatory front, the MTBPS said the process to split the Department of Mineral Resources and Energy (DMRE) into two departments should be completed by April 2025. The Minerals Council noted that this was good news as it should result in a more mining-focused Department of Mineral and Petroleum Resources.

A key component of the challenge in the logistics sector is a weak Transnet balance sheet. As expected, the MTBPS was firm that at this stage, Treasury remains opposed to any further financial support for Transnet in addition to the R47-billion guarantee facility announced in late-2023. The MTBPS argued that Transnet needs to dispose of non-core assets and reduce its cost structure and that Transnet should explore alternative funding models for infrastructure and maintenance. These include project finance, third-party access, concessions and joint ventures.

“While we fully support these sentiments and appreciate the country’s fiscal straight jacket, it remains unclear how Transnet will fund a significant maintenance backlog without a degree of balance sheet recapitalisation that is tied to strict conditions,” said Hugo Pienaar, chief economist at the Minerals Council.

As the experience with Eskom has shown, some relief of balance sheet pressures should enable Transnet to spend more on infrastructure upgrades and maintenance. “This will not only boost growth, investment and jobs in the bulk3 mining industry, which is responsible for almost 50% of total mining production and which provided export earnings of more than R260-billion in 2023, but it will also support non-mining sectors such as agriculture and manufacturing,” said Pienaar.

Private sector participation in the logistics sector is a must-needed reform but is unlikely to materially improve operational performance in the absence of significant near-term investment that improves the quality of the logistics infrastructure.

 

Infrastructure investment

The Minerals Council said that it is encouraged by the focus in the MTBPS on initiatives to lift growth-enhancing public sector infrastructure investment. Among other measures, this includes actions to scale up private sector participation, carving out government borrowing for infrastructure as a standalone category of government’s overall borrowing requirements, and extending the scope of borrowing to include infrastructure bonds.

“Improved public infrastructure spend will not only benefit mining through lowering the cost of doing business and unlocking latent growth potential, but also boost demand for mining-related building materials,” says Pienaar.

Per the Minerals Council, outside of mining, the main Budget in February 2025 may provide clarity on the introduction of a new fiscal anchor to guide fiscal policy, as well as a possible change to the SA Reserve Bank’s inflation target. At this stage, Treasury expects headline CPI inflation to average 4.5% during the next three years. Additionally, for the Minerals Council, the key takeaway from the MTBPS is that South Africa’s public finances remain precarious. At 75.5% of GDP in 2025/26, gross debt is now projected to peak somewhat higher than envisaged in the February 2024 Budget. The higher debt peak is a function of lower revenue projections and more spending. Although moving lower as Treasury budgets for primary budget surpluses3, the debt ratio also remains higher over the medium term than outlined before. It now ends at 69.3% of GDP in 2031/32 versus the 67.1% expected in February.

 

Investor confidence

According to the Banking Association South Africa, the MTBPS succeeded in putting in place the policies needed to turn increasing confidence in South Africa into investment opportunities in the economic infrastructure discussed above, stating:

  • Policies that promote increased opportunities for meaningful investment partnerships with business in vital economic infrastructure have been set out.
  • The MTBPS continues to strengthen responsible fiscal management in South Africa; with government continuing to focus on reducing debt to a sustainable level. Government remains on track to achieve a primary budget surplus, which will further boost investor confidence.
  • Government remains committed to protecting the social wage, to provide necessary social support and security to vulnerable South Africans. Social stability is an important part of consumer, business and investor confidence.

In the view of the Banking Association, the MTBPS was subdued, but the lack of big-ticket spending and bailouts for state-owned enterprises showed that government has the political will to get its finances in order. Rather than spend inefficiently, it has committed to deliver on policy reforms that are necessary to attract private sector investment and skills into vital economic infrastructure. This opens the way for partnerships with business to repair and replace water and transport infrastructure, and to improve local government operations and services – which threaten South Africa’s economic recovery.

 

A dedicated capacity to create a credible pipeline of projects that can be taken to market, as well as an improved capital budgeting process and the de-risking of public sector projects are essential to unlocking private sector investment in infrastructure. The association said that there is no investment strike in South Africa but concrete projects, policy certainty, the pragmatic and efficient implementation of regulation and legislation, and a growing economy, are all needed to attract investment.

 

Fighting financial crime

The Banking Association added that the minister correctly lauded the considerable progress that has been made in South Africa’s Action Plan to exit the Financial Action Task Force (FATF) grey list of countries that have weaknesses in their capacity to fight financial crime. Furthermore, the timely removal of South Africa from the grey list will not only reduce the compliance costs and complications of doing business with South Africa but will also strengthen the fight against crime and corruption in the country, to the benefit of all its citizens.

After its latest review, FATF concluded that South Africa has “largely addressed 16 of the 22 action items” required to ensure its anti-money laundering and terror financing capacity met international standards. However, the association highlighted that most challenging outstanding item is the sustained, successful prosecution of financial crimes. The creation of a “capable, ethical and developmental government” must include the further bolstering of the criminal justice system.

Although diasappointed at the minor expansion of 1.1% in GDP in 2024 and forecast of 1.8% over the medium-term, the association said that there was hope that the economy might over-deliver. Given the real improvements in the business operating environment and investor sentiment, South Africa’s economic outlook is the best it has been for many years.

Despite the fact that GNU has so far shown a better ability to improve governance and implement necessary economic and fiscal reforms, which has boosted business, investor and consumer confidence, the Banking Association South Africa said, “Confidence is a fragile thing and political and social risk is always a concern in a deeply unequal society. It is the responsibility all who are part of the GNU to be considered in their remarks – and avoid brinkmanship – when, as must be expected, there are differences between parties. It is a cause for hope for the future that while there may be differences about the practicalities, many stakeholders in the economy are agreed that it is only by facilitating economic growth and effective partnerships that South Africa will be able to manage its competing priorities of reducing debt, while investing in its economic infrastructure and its people.”

Source:

  1. Minerals Council South Africa: “MTBS boosts infrastructure spend outlook, with mining set to benefit.”
  2. Banking Association South Africa: “The 2024 Medium Term Budget Policy Statement”

 

References:

  1. This is in line with the latest consensus from private sector economists for growth in 2024. For next year, the fact that Treasury’s growth forecast is at ‘only’ 1.7% highlights the scale of work required to get to the 3%+ upside growth scenario recently presented by the business sector and informed by modelling from the Bureau for Economic Research.
  2. World GDP per capita for 2023 was USD13,138, a 3.21% increase from 2022. https://www.macrotrends.net/global-metrics/countries/WLD/world/gdp
  3. Bulk mining refers to the iron ore, coal, chrome and manganese sectors. 
  4. The primary budget measures the difference between government revenue and non-interest government expenditure.