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MTBPS: Staying the course?

29 October 2020

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by Nolan Wapenaar, Co-Chief Investment Officer

In what is seemingly becoming his trademark, Finance Minister Tito Mboweni delivered a short-worded, Medium Term Budget Policy Statement (MTBPS) on Wednesday (28 October), highlighting both the need for fiscal consolidation and the high execution risk present. Below, we look at some of the key takeaways from his speech.

On the positive side, government reiterated its commitment to reducing spending growth, shifting spending patterns, and stabilising the country’s debt-to-GDP ratio in the medium term. Positively, the projected fiscal consolidation is not premised on unduly optimistic revenue expectations or excessive tax hikes. Furthermore, economic growth estimates for 2021 (3.3%) and 2022 (1.7%) are more on the low side – thus leaving scope for positive surprises in future. Notably, most of the government’s spending cuts are coming from the wage bill, and the deficit for 2020 remains as set out in June’s special adjustment budget. It is anticipated to rise to 15.7% of GDP and the debt-to-GDP ratio is expected to increase to 81.8% of GDP or R4trn at the end of the current year. Government has thus far been surprisingly committed to the wage bill savings, supported by the strong public sector wage growth in recent years and in the context of severe pressure on private sector employment and income during the current economic crisis amid the COVID-19 pandemic.

However, in what were some of the most positive aspects of the MTBPS, the finance minister categorically ruled out prescribed assets and debt-funded spending to try and stimulate the economy. This follows the ANC’s Head of Economic Transformation, Enoch Godongwana’s recent confirmation that identifying viable developmental investment opportunities would be the focus for government instead of resorting to a policy of prescribed assets.

Unfortunately, there were also some negatives in the speech starting with SAA, which will be receiving yet another bailout to fund its business rescue process. This will be largely funded by cuts in basic service provisions. In our view, this sets an uncomfortable precedent with regards to the government’s handling of problematic state-owned enterprises (SOEs). Interestingly, the Land Bank received a further R7bn bailout, which is quite sizeable when considered against the recent R3bn bailout of the same entity.

Government debt is now expected to stabilise at c. 95% of GDP, which is more realistic than previous assumptions. While it is a very high number, we believe that it is plausible. Still, it is at the upper end of the range the market was expecting. If there is any market fallout from this, it will be minor.

There were some glaring omissions from his speech – nothing was said on Eskom or on increasing taxes (though it appears that government plans to raise an additional R5bn in taxes next year). Still, this is a relatively small number and implies no meaningful increases in taxes or tax rates. The economic growth estimate for 2020 is now a contraction of 7.8% YoY, which is an improvement from the 8.2% YoY decline projected by the SA Reserve Bank.

Following the speech, local bonds were about 10bpts to15bpts weaker. However, we highlight that global sentiment towards emerging markets (EMs) was negative on Wednesday, so it is difficult to say how much of this weakness is due to the budget and how much is due to the global environment. We would venture to guess that it is probably a bit of both.

 

 

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