What business wants Tito to say
Markets will be hoping for meaningful debt and privatisation signals in the medium-term budget.
When Finance Minister Tito Mboweni delivers his medium-term budget policy statement on Wednesday, the initial response will come from the markets. Analysts and opinion writers will weigh in afterwards with thoughtful comments, but the markets will be the first acid test of its credibility.
If the rand tanks and bond yields spike significantly, it will have failed the first test.
That will mean the initial assessment — fairly or unfairly — is that the Treasury has failed to deliver a convincing case on how it will contain South Africa’s soaring debt levels over the next three years, which is the fiscal planning horizon for the medium-term budget.
In his emergency 2020/21 budget in June — which replaced the February budget that the Covid-19 economic meltdown had consigned to the scrapheap — Mboweni revised his initial debt:GDP forecast of just over 65% by 2024 to 87.4%, compared with the 81.8% it hit this year.
“A sovereign debt crisis is when a country can no longer pay back the interest or principal on its borrowings. We are still some way from that. But if we do not act now, we will shortly get there,” the finance minister said in June.
Debt is the tool the government uses when spending outpaces revenue, and the pandemic and the phased lockdowns to contain it have cut revenue streams to a trickle.
The South African Revenue Service predicts a revenue shortfall of just over R300-billion this year, which is hardly a shocker after more than two million people lost their jobs in the second quarter and with the economy expected to contract 8% this year or more.
Yields on the benchmark ZAR2030 bond are basically back at pre-Covid levels in a range of 9% to 9.5%. A big spike in these yields will suggest that the markets, and by extension investors, are not buying the plan that Mboweni outlines.
Put another way: as a lender, if you think the borrower is risky, you will demand a bigger interest rate.
So, what will business and the markets — including lenders — expect to see?
Nazmeera Moola, head of South Africa investments at Ninety One, said it was critical to “communicate the magnitude of the growing debt burden. Interest is projected to consume nearly one in every five rands government spends in the next four years. That is not sustainable.”
So the markets will want to see a clear plan to reverse the situation — which means asset sales or budget cuts, notably to the public sector wage bill that soared under former president Jacob Zuma’s patronage network.
On the vexed question of SAA, the flying bar beloved by ANC cadres that drains state coffers faster than the free dop it serves, Moola said: “Any allocation to SAA needs to be accompanied by a clear, competent partner who will take over control of the airline.”
She also makes the point that issuance at weekly bond auctions “is currently running somewhat ahead of requirements for the current year.” As a result, she says “National Treasury should take the opportunity to reduce the weekly auction size. Reducing issu
ance at this juncture will lead to lower bond yields, thus reducing borrowing costs.”
Business will be hoping for other things as well.
In reaction to the economic plan that President Cyril Ramaphosa recently unveiled, the Minerals Council South Africa, which represents the mining industry, said business wanted to see structural reforms.
“Business believes that these … should include much greater private sector participation and competition in infrastructure (electricity, ports, pipelines, rail); a much more sustainable fiscal policy and balanced budgets; and institutional reforms (a smaller, more efficient and more capable state),” it said.
Mboweni can flag all these things in his
address — reducing the state’s role in such areas will free up its scarce capital for use in others. Education, health and welfare would all be great places to put it, but some of it will have to go to paying down the debt.
However, as the Daily Maverick’s Ferial Haffajee pointed out this week, the presidency appears to have displaced the Treasury as the driver of economic policy, with a decided shift in favour of the state.
Given the drain on revenue and the need to contain debt, tax breaks seem unlikely on the horizon. Peter Attard Montalto, head of capital markets research at Intellidex, told
Business Maverick that business would like to have “a clearer sense of carbon tax path.”
It goes without saying that the private sector, at the corporate or household level, would like to see tax cuts.
Taxes of course are another vexed issue. In a society with South Africa’s glaring disparities of wealth and income, more than a few taxpayers don’t mind paying hefty taxes if the money is well spent.
But that has generally not been the case. And the state simply lacks the capacity to greatly improve the delivery of services.
So in lieu of potential tax cuts, signals of privatisation will be welcomed by business.
“Overall, business wants to see Treasury doing whatever is in its power to boost economic growth that doesn’t require the say-so of other departments,” said Attard Montalto.
These structural changes should include much greater private sector participation and competition in infrastructure … balanced budgets and institutional reforms