Speech gives the market a welcome boost of positive news
Economists and the rand responded well to plans to keep taxes low and cut the public sector wage bill, though promises in the budget may not be enough to avert a downgrade of SA’s sovereign debt to junk status.
Local risk assets soared after finance minister Tito Mboweni’s budget speech, with the rand firming about 0.7% to the dollar, while local banking stocks jumped more than 6%. The generic 10-year government bond reached its best level in seven months.
“This appears to put SA on the right track to avoid a downgrade,” said Citadel’s chief economist, Maarten Ackerman, but this would ultimately be determined by the government’s ability to deliver on its plans.
“They have shown they are willing to address the elephant in the room, which is the public sector wage bill,” said Ackerman, though this may be difficult to execute if opposed by unions.
Slow growth and revenue shortfalls will translate to budget deficits over the next three years that are set to stay above 6%, the Treasury said, peaking at 6.8% in 2020/2021 and falling to 5.7% in the year ending 2023.
A R160bn drop in the remuneration costs for national and provincial administrations and other public bodies will account for the bulk of the anticipated R261bn in savings, equal to 1% of GDP for the next three years.
“It’s hard to remember the last time the market enjoyed a speech by a finance minister in SA,” said Monex Europe’s Simon Harvey, adding that the optimism may not last. The progrowth aspects and longer-term promises on the budget deficit should be enough to at least delay a downgrade by Moody’s
Investors Service, he said.
SA needs structural reforms and economic growth, said Harvey, and Mboweni presented what seems to be a credible solution in the short term for SA’s fiscal position, even if the budget deficit will rise in the short term before falling again.
“Markets have become a bit numb to the promises, however, and what we need to see before the next budget is some progress in implementation.”
The JSE, rand and local bonds firmed noticeably soon after Mboweni began speaking, reversing earlier losses.
By 6pm the rand had gained to R15.13/$. The JSE closed 0.43% higher, with the banking index leaping 6.21%, its best day in more than two years.
The government has signalled its intention to restructure the corporate income tax system over the medium term by broadening the base and reducing the rate. This was a necessary move as SA’s rate of 28% was above the global average.
The Treasury stressed, however, that this was a future plan, said Ackerman.
The government’s problem is revenue rather than spending, said Capital Economics senior emerging-markets economist John Ashbourne. Cutting wages will be difficult politically, while a weakening fiscal position and rising debt make a downgrade by Moody’s still likely, even if it didn’t happen as soon as March, he said.
BNP Paribas chief economist Jeffrey Schultz said that while the budget makes the right noises, and not raising taxes further was the right call, the state faces tough negotiation with its workforce. While Moody’s may not move in March, a downgrade sometime in 2020 is probably inevitable, he said.