Pravin Gordhan’s tough juggling act
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.
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.
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.
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.