By Nazmeera Moola, Deputy MD, Investec Asset Management
At first glance Finance Minister Tito Mboweni’s maiden Medium-Term Budget Policy Statement (MTBPS) does not paint a pretty picture and the market is likely to hate it. The headlines in particular are dreadful: the consolidated deficit rises to 4% this year, raising the spectre of a Moody’s downgrade, debt issuance over the next three years rises by R55bn and debt only peaks in 2024/25.
However, Mbwoneni’s speech was far stronger than the MTBPS. He discussed in detail the weakness of growth that resulted in Treasury’s growth downgrades – and the structural requirements that are needed to resolve the growth profile. He emphasised the bloated public sector wage bill that must be reined in and talked about the need to restore confidence and strengthen institutions. The ultimate key to success and stability is growth. Growth will create jobs, boost government revenues and stabilise the fiscus.
And despite the awful deficit number, the devil is in the detail and it is worth noting a few things:
- The deterioration in the 2018/2019 financial year is due to a fairly realistic assessment of the outstanding VAT refunds. National Treasury is expecting a R20bn increase in refunds this year, of which R11bn will be released immediately to bring down the level of historical unpaid refunds.
- The decline in growth and buoyancy forecasts is more conservative than we – or the market – had expected, particularly in the next three years. They look plausible, but action is required on a number of structural areas to meet those forecasts. This dramatically reduces revenue forecasts in the coming years. If growth realises higher than Treasury forecasts (which is possible if the politicians decide to act), that will see a slight improvement in the current forecasted deficit.
- National Treasury has budgeted for no new revenue or expenditure measures in the 2019 Budget. They have assumed full compensation for bracket creep for personal income tax.
- The expenditure ceiling has not been breached – despite the bailouts for SAA and the Post Office and the wage hikes. There was no increase to the expenditure forecasts to accommodate the higher wage settlement. Government departments will have to reprioritize spending to close the gap. Across the budget, there is a significant reprioritisation of spending. This includes the movement of capital budget from PRASA that has not been spending to SANRAL.
- National Treasury has not budgeted for revenues from spectrum sales. If progress is made on this area, which will also have growth benefits, this would increase revenues in the year it takes place. This could easily reduce the deficits forecast for next year.
- National Treasury is looking to reduce pressure on households and small businesses and they ironically noted that the increase in VAT refunds represents a “stealth” fiscal stimulus, as it will return R20bn extra to businesses in the current year.
- The increase in bond market issuance is more limited than the downgrades to revenue forecasts.
Will Moody’s downgrade?
Following large improvements shown in the February 2018 Budget, Moody’s moved South Africa’s credit rating outlook from negative watch to neutral and retained the investment grade rating on both the local and foreign currency debt. In their update last week, Moody’s was budgeting for a significant deterioration in the budget deficit in the coming years. However, they were still looking for a consolidation in debt-to-GDP at around 55% of GDP. The current projections from National Treasury sees debt peaking at 59.6% of GDP – a fair bit higher. The big question is whether the MTBPS presents a big enough negative event to warrant an inter-meeting move in the outlook. We suspect not, but if action is not taken in the February 2019 Budget, the outlook is likely to move to negative at that point.
Unfortunately, what this MTBPS appears to demonstrate is that this government is unable to make hard decisions, as reflected by the public sector wage increases, and subsequent lack of consolidation. We are also starting to come to terms with the long-term costs of Jacob Zuma’s cadre deployment. SARS being forced to play catch-up with unpaid VAT refunds in this year is but one – there will be similar costs elsewhere in the system.