Pravin Gord­han’s tough jug­gling act

The Star Late Edition - - OPINION & ANALYSIS - Craig Pheif­fer Craig Pheif­fer is the chief in­vest­ment strate­gist, Absa Stock­bro­kers and Port­fo­lio Man­age­ment.

FI­NANCE Min­is­ter Pravin Gord­han con­tin­ues to face a tough jug­gling act over which to pri­ori­tise: fund­ing the econ­omy’s de­vel­op­men­tal agenda or toe­ing the line of fis­cal dis­ci­pline as rec­om­mended by global rat­ing agen­cies.

When he de­liv­ered his Medium-Term Bud­get Pol­icy State­ment last Oc­to­ber, Gord­han re­solved to re­store the mo­men­tum of growth to en­sure that it is in­clu­sive and sus­tain­able. He also sought to pre­serve South Africa’s in­vest­ment-grade sta­tus by propos­ing the fol­low­ing: Fis­cal con­sol­i­da­tion ac­cel­er­a­tion. Sta­bil­i­sa­tion of the net na­tional debt at 46.2 per­cent of gross do­mes­tic prod­uct in 2017/18, and to de­cline af­ter that.

A cut of the bud­get deficit to 2.4 per­cent by 2018/19.

A cut to ex­pen­di­ture ceil­ing over the next three years by R25 bil­lion, mainly by cur­tail­ing per­son­nel spend­ing.

Tax in­creases amount­ing to R18bn in 2016/17.

A fur­ther R15bn a year in 2017/18 and 2018/19 in tax in­creases.

An ad­di­tional R16bn al­lo­ca­tion to higher ed­u­ca­tion over the next three years, funded through repri­ori­ti­sa­tion of ex­pen­di­ture plans.

R11.5bn ad­di­tion to so­cial grant al­lo­ca­tions over the next three years.

Repri­ori­ti­sa­tion of funds to re­spond to the im­pact of the drought on the farm­ing sec­tor and wa­ter-stressed com­mu­ni­ties.

Go­ing into this year’s Bud­get Speech, we be­lieve these are the pro­pos­als that the min­is­ter will likely ex­pand on. He’s ex­pected to give clar­ity on how each of these pro­pos­als will be funded. On the pol­icy/ leg­is­la­tion front, he’s also ex­pected to give an up­date on the fol­low­ing is­sues: Progress on the car­bon tax bill. The in­tro­duc­tion of the sugar tax. The in­tro­duc­tion of the tyre levy. Progress on con­sul­ta­tions about min­ing reg­u­la­tory changes.

The lat­est on the min­i­mum wage frame­work.

Where we are with re­form of the re­tire­ment sys­tem, given op­po­si­tion by or­gan­ised labour.

The Na­tional Health In­sur­ance and progress of the pi­lot projects.

Dur­ing his MTBPS, Gord­han had also planned to achieve con­sid­er­able sav­ings to the gov­ern­ment, while also en­sur­ing that pro­cure­ment pro­cesses are stream­lined and ser­vice providers are paid on time.

Shed­ding light

In this re­gard, he is ex­pected to shed light on how he has pro­gressed on:

Re­stric­tions on fill­ing man­age­rial and ad­min­is­tra­tive va­can­cies and elim­i­na­tion of un­nec­es­sary gov­ern­ment po­si­tions.

Cap­i­tal bud­get­ing re­forms to align plans with bud­get al­lo­ca­tions while strength­en­ing main­te­nance pro­ce­dures.

En­forc­ing pro­cure­ment trans­parency and ac­ces­si­ble ref­er­ence prices for a wide range of goods and ser­vices.

A na­tional travel and ac­com­mo­da­tion pol­icy and in­struc­tions on con­fer­ence costs.

New guide­lines to limit the value of ve­hi­cle pur­chases for po­lit­i­cal of­fice-bear­ers.

Rene­go­ti­a­tion of gov­ern­ment leas­ing con­tracts.

New cen­trally ne­go­ti­ated con­tracts for bank­ing ser­vices, ICT in­fra­struc­ture and ser­vices, health tech­nol­ogy, school build­ing and learner sup­port ma­te­ri­als.

On the is­sue of eva­sion of tax, we ex­pect the min­is­ter to again en­cour­age full dis­clo­sure. Last year he pledged to con­tinue to act ag­gres­sively against tax dodg­ing. He said from this year, in­ter­na­tional agree­ments on in­for­ma­tion shar­ing would en­able tax au­thor­i­ties to act more ef­fec­tively against il­licit flows and abu­sive prac­tices by multi­na­tional cor­po­ra­tions and wealthy in­di­vid­u­als.

Build­ing on the ex­per­tise gained by the Large Busi­ness Cen­tre since its es­tab­lish­ment in 2004, Gord­han main­tained that the SA Rev­enue Ser­vice is well placed to take ad­van­tage of the new Com­mon Re­port­ing Sys­tem and that South Africa’s in­ter­na­tional col­lab­o­ra­tion is an es­sen­tial part of ef­forts to en­sure that the tax sys­tem re­mains ro­bust and con­trib­utes to in­clu­sive growth.

Tax eva­sion is said to cost de­vel­op­ing coun­tries $200bn every year.

As has been the case with the 2016/17 Bud­get, this year’s will also have to ta­ble spend­ing pro­pos­als that are aimed at avoid­ing a credit rat­ings down­grade.

To this end, Gord­han will have to bal­ance the de­sire for sta­ble and sus­tain­able pub­lic fi­nances, eco­nomic re­forms, and a trans­par­ent mon­e­tary pol­icy that can sup­port a return to the higher growth rates needed to achieve the Na­tional Devel­op­ment Plan’s goals.

Even as the min­is­ter con­cedes that the macro-eco­nomic tools at hand are lim­ited, the gov­ern­ment’s com­mit­ment to a fis­cal con­sol­i­da­tion path is what will ap­pease rat­ings agen­cies. These are their con­cerns:

Stan­dard & Poor’s (S&P) in De­cem­ber noted that it could re­vise its neg­a­tive out­look to sta­ble if it ob­served pol­icy im­ple­men­ta­tion lead­ing to im­prov­ing busi­ness con­fi­dence and in­creas­ing pri­vate-sec­tor in­vest­ment, and ul­ti­mately con­tribut­ing to higher gross do­mes­tic prod­uct growth and im­prov­ing fis­cal dy­nam­ics.

How­ever, the rat­ings agency also raised con­cerns about the risks gov­ern­ment faces in re­spect of non-fi­nan­cial pub­lic en­ter­prises with weak bal­ance sheets, which may re­quire more gov­ern­ment sup­port. Along with Eskom, S&P says the sta­te­owned en­ti­ties (SOEs) that could pose a risk to South Africa’s fis­cal out­look in­clude na­tional road agency San­ral (not rated), which is hav­ing rev­enue col­lec­tion chal­lenges with its Gaut­eng tolling sys­tem, and SAA (not rated), which may be un­able to ob­tain fi­nanc­ing with­out ad­di­tional gov­ern­ment sup­port.

Gord­han will thus be closely watched again to see how much of the coun­try’s al­ready lim­ited re­sources he will set aside for these of­ten dys­func­tional SOEs.

Gord­han will have to bal­ance the de­sire for sta­ble and sus­tain­able pub­lic fi­nances, eco­nomic re­forms and a trans­par­ent mon­e­tary pol­icy.

Mar­kets

The Na­tional Bud­get’s im­pact on the mar­kets will likely be trans­mit­ted via the cur­rency mar­ket. Mar­ket watch­ers will eye the Bud­get keenly for any announcements that might sway the credit rat­ings agen­cies’ view of our sov­er­eign rat­ing one way or another.

As touched on above, that view is based on key vari­ables such as sov­er­eign debt lev­els, the Bud­get bal­ance, eco­nomic growth and the ex­pected path of those vari­ables over the medium-term ex­pen­di­ture frame­work.

Fur­ther fis­cal slip­page (a widen­ing Bud­get deficit) or greater-than-fore­cast debt lev­els (from the MTBPS in Oc­to­ber) would be neg­a­tively re­ceived by the rat­ings agen­cies and, with S&P and Fitch, the next move lower in the off­shore sov­er­eign rat­ings is to sub-in­vest­ment grade (col­lo­qui­ally “junk” sta­tus).

One could de­bate whether or not the cur­rent rand/dol­lar ex­change rate is pric­ing in a rat­ing down­grade but bad news from the Bud­get could see a weaker rand both in the short- and long-term, es­pe­cially if it does lead to sub-in­vest­ment grade sta­tus. Over the course of this year, our base case re­mains for a R13 to the dol­lar to R14 to the dol­lar range, with a year-end ex­change rate closer to R14 to the dol­lar.

A weaker cur­rency, how­ever, would have spe­cific con­se­quences for in­fla­tion.

In­fla­tion

The South African Re­serve Bank (SARB) cur­rently ex­pects that in­fla­tion will only head back into the 3 per­cent to 6 per­cent tar­get band in the fi­nal quar­ter of this year. Stub­bornly high food in­fla­tion should re­cede in time to help the head­line Con­sumer Price In­dex to av­er­age around 5.6 per­cent in both 2017 and 2018.

While this is com­fort­ing and should keep the Re­serve Bank from hik­ing rates any time this year, the fact that in­fla­tion is set to bob just be­low the up­per band of 6 per­cent means that the hur­dle to any rate cuts is sub­stan­tial.

Over the SARB’s two-year in­fla­tion fore­cast pe­riod, in­fla­tion is ex­pected to re­main within the tar­geted range but at the very up­per end of the band. A weaker cur­rency would cause the in­fla­tion out­look to de­te­ri­o­rate and bring on the prospect of higher rates.

Money mar­ket rates would drift higher in an­tic­i­pa­tion of a higher repo rate and that would be good news for savers but not for a highly in­debted pop­u­lace. Higher in­ter­est rates would also neg­a­tively im­pact busi­ness and con­sumer con­fi­dence which are both al­ready at a low ebb.

The MTBPS that was tabled in Oc­to­ber re­flected a weaker fis­cal po­si­tion than was pre­sented in last year’s Fe­bru­ary Na­tional Bud­get, so the mar­ket has al­ready been sen­si­tised to this fis­cal slip­page. We strangely es­caped per­sonal in­come tax (PIT) in­creases last year and it is very likely that Bud­get rev­enues will be boosted by higher PIT this time around.

That could well help with pre­vent­ing any fur­ther fis­cal slip­page from the MTBPS in this Bud­get, even with a very slow grow­ing econ­omy. Any ad­di­tional cred­i­ble growth ini­tia­tives would also be very well re­ceived. Whichever way it goes, the mar­kets will keenly watch the pro­nounce­ments of the Fi­nance Min­is­ter, who­ever that may be at the time.

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