Budget Challenges I: The Economic Environment

This is the first of three briefs on the challenges to be faced in the presentation of the 2019 Budget on 20 February. It deals with the global and local economic environment. The second brief will discuss public debt and the third will deal with government revenue and expenditure and their policy implications.

Global growth

Expectations of global growth in 2019 are becoming more pessimistic.  Whereas the International Monetary Fund projected global growth of 3.9 percent in April 2018, the October 2018 projection was reduced to 3.7 percent, and the projection in the January 2019 update dropped further, to 3.5 percent.  The IMF projections for emerging market economies dropped for 5.1 percent in April 2018 to 4.7 percent in October 2018 to 4.5 percent in January 2019. 

Moreover, downside risks are increasing.  The January 2019 update points to the following possibilities:

  • A sharper escalation of trade tensions than expected.   The IMF warns that an escalation in the current trade disputes could decrease global growth by another one percent.[1]
  • Tightening financial conditions
  • A series of triggers sparking a further deterioration in risk sentiment with adverse growth implications, especially given the high levels of public and private debt. These potential triggers include a hard Brexit and a greater than envisaged slowdown in China.

Emerging markets and low income economies face pressure from adverse changes in exchange rates, higher borrowing costs associated with increased interest rates, as well as capital outflows. Furthermore, developing countries with large budget and current account deficits as well as high levels of debt have experienced sharp currency volatility, decreasing investor appetite for assets in these countries.

South African growth

The following table compares real GDP growth projections for South Africa:

Real GDP Growth rates projections (%) South Africa









World Bank












National Treasury

(0ctober 2018 MTBPS)




Unsurprisingly, the South African projections are more optimistic than those of the international finance institutions.  We would prefer to see a budget which is sustainable at the IMF/World Bank growth rates. 

Over the last few years, South Africa has continually had to revise its economic growth forecasts downward, and per-capita GDP continues to decline as the economy grows more slowly than the population.  In the October 2018 Medium Term Budget Policy Statement, Treasury forecast that GDP growth will slow to 0.7 per cent in 2018, down from 1.3 per cent in 2017. The current economic outlook is weaker than projected in the February 2018 Budget, which forecast 1.5 per cent and 1.8 per cent GDP growth in 2018 and 2019 respectively.  All estimates are well below the 5.4 percent annual growth called for in the National Development Plan.

In January the SARB revised expected growth in 2018 up to an average of 0.7 percent (from 0.6 percent in November). Its growth forecast for 2019 is 1.7 percent (down from 1.9 percent), 2.0 percent for 2020 and 2.2 percent in 2021.  Private sector fixed investment remains weak and production in key sectors volatile. [2] The 2018 Medium Term Budget Policy Statement (MTBPS) reported that growth in gross fixed-capital formation slowed to 0.1 percent in the first half of 2018 and was expected to be 0.9 percent for the year as a whole.  Weak domestic demand too placed pressure on growth in 2018, constrained due to recent tax changes and slow credit growth. And despite a stabilisation of food prices and moderate wage growth, a hike in petrol prices too subdued household consumption.[3]

The SARB’s assessment of the risk to growth is on the downside; weak business and consumer confidence weigh on fixed capital formation and they could be exacerbated by the protracted electricity supply constraints. Agreeing with the IMF, the Monetary Policy Committee is of the view that the current challenges facing the economy are structural; credible structural policy initiatives that will broaden competition and economic opportunities are seen as necessary to a marked improved in GDP growth and unemployment.

A stable inflation rate is important for fostering a positive growth environment. Here South Africa has been doing well and the outlook is that this – save any major external shocks – will remain the case for the foreseeable future, with inflation expected to remain within the target range at 5.3 percent in 2020 and 4.8 percent in 2021.   The greatest risk here will be higher oil prices impacting on the exchange rate, which could take inflation to the upper part of the 3-6 precent target range. Prudent monetary policy will be required to address any upward pressures on inflation while growth remains low; accommodative to support growth, but tightened moderately should inflation continue to rise.  The threat of a Moody’s sovereign rating downgrade remains.  If realised, it would require an emergency monetary policy response.   

The moderate pickup in growth in 2019-20 is expected to be driven by exports off the back of a weakened exchange rate, but high unemployment will weigh on demand and confidence. Should policy uncertainty ease, there should be an increase in investment and growth, but no-one expects this to be large. Investment is expanding, but only moderately due to policy uncertainties around the land reform and the governance of state-owned enterprises.

Externally, the economy will remain vulnerable to a faster-than-expected normalisation of US and European monetary policy, implying global financial tightening (though this risk seems to be declining), escalating global protectionism and negative investor sentiment towards emerging-market economies.


It is quite clear that neither the coming Budget, nor the next one, nor the one after that can rely on rapid growth to float us out of severe fiscal constraints.  The global economy is weakening, downside risks predominate, and at best we can expect a 0.5 percent increase in the growth rate in 2021, and that only if there are no economic or fiscal catastrophes.  The Budget needs to manoeuvre carefully within a narrow fiscal space.  Otherwise it will be badly received and contribute to further pessimism in expectations.

Charles Collocott


Agathe Fonkam


Charles Simkins
Head of Research


[1] https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018

[2] Statement of the Monetary Policy Committee. 17 January 2019.