Firms selling to the public sector should plan for muted demand growth and tough pricing negotiations
Firms can expect muted demand growth, tough pricing negotiations, and payment delays from public sector customers for the foreseeable future. MNCs looking to raise performance should position their offerings as providing efficiency gains and cost-cutting solutions to cash-strapped government departments. Closely tracking polling ahead of the May 2024 election will help companies prepare for sudden changes in fiscal policy and/or the replacement of key decision makers that could alter departmental budgetary allocations—and thus public sector demand opportunities—in the event of a change in government.
- Finance Minister Enoch Godongwana revealed a deterioration in public finances—specifically a ZAR 56.8 billion (US$ 3.04 billion) revenue shortfall for the 2023/2024 fiscal year—during the Medium Term Budget Speech (MTBS) on November 1, 2023.
- The treasury now forecasts a budget deficit of 4.9% of GDP (up from 4%) for the 2023/2024 fiscal year and expects the public gross debt-to-GDP ratio to peak at 77.5% (up from 73.6%) in 2025/2026 because of higher debt servicing costs and weak tax revenues caused by slow economic growth.
- To maintain progress toward fiscal consolidation, spending on social protection payments, municipal infrastructure investment, and tertiary education has been trimmed for the remainder of the 2023/2024 fiscal year. However, spending on most other departments, including healthcare and law enforcement, has been protected. No tax increases have been announced.
Most government departments will face strained finances over the coming months, although a dramatic change in fiscal policy is unlikely before the May 2024 elections because President Cyril Ramaphosa and Godongwana are reluctant to unnerve investors. The February 2024 budget speech—during which the treasury will set out its tax and spending program for the 2024/2025 fiscal year—will likely yield small increases in vote-winning spending, such as time-limited increases to the social grants. Looking beyond May 2024, the new government’s determination (or lack thereof) to prioritize fiscal stability will depend on the composition of a coalition after the election. A heavily ANC-dominated government (which is FrontierView’s base case) is not expected to abandon fiscal prudence and will continue a gradual expansion of austerity measures over the coming years. In contrast, a downside scenario involving a coalition in which the ANC loses control of key ministries—such as the treasury—would increase the likelihood of populist spending being prioritized over the procurement of goods and services and CAPEX.
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