SA slicing salami as twin threats bear down

This was a great budget. It managed to cut weekly bond auctions in the next fiscal year from R6.6bn to about R5.3bn while shifting the political gravity by maintaining three years of nominal wage freezes and cuts in grants in real terms.

What an odd budget. One that couldn’t spend R4bn extra to deliver inflation cover to grant recipients at a time when food inflation is starting to climb sharply. A budget that admits in its own review that the education spend is “expected to negatively affect learning outcomes”, and couldn’t even mention anything about the Eskom elephant in the room.

Both of these situations seemed to exist at once. Schrödinger’s cat has moved to Magoebaskloof.

For good or bad, this was a triumph of the Treasury’s absolute control of the budget process. The Treasury can “win” as long as there is no other viable option on the table. Yet even the Treasury would admit this is not an optimal budget.

While reviews of individual policy expenditure areas and programmes do happen, expenditure reviews of whole departments have not progressed but will do so slowly from here. An expenditure review of the Treasury and the department of public enterprises in the coming year will not move the dial.

There is longer to wait till we actually see major departments reviewed and the recommendations implemented.

Who is the priority? A nurse, a teacher, a soldier or a public servant? What is the worth of a Pretoria paper pusher vs a municipal engineer? Is primary education more important than university education? Is a social grant more important than tax bracket creep?

Such debates are maybe impossible to rationally resolve, but that is exactly the point. Then politics steps in and decides. But at least decisions are still made.

At the moment we are stuck in a world of iteration — salami slicing as debt service costs continue to grind higher. Explode a few landmines such as the bailout of state-owned enterprises or university funding or a basic income grant to come. Salami slice some more. This works to present a budget or a medium-term budget policy statement, but it is not sustainable. At some point the suboptimal outcomes blow back on the politics and break the system.

The question then is if you have a fiscal crisis from a populist corrective impulse, do you strap yourself to the mast as the friendly IMF arrives on an SAA flight? The Treasury cannot lead such discussions. It must happen in the ANC and at cabinet, as a political and not a technocratic exercise — before it is too late.

What has the budget achieved then? It has shifted the skew in dangers around the debt trajectory to a slightly lower level and balanced the risks with a fair amount of buffer against future shocks.

Yet considered together with the state of the nation address, we don’t get the answers to fundamental questions, in particular the risks to

SA’s isolation from global capital flows.

“What?” I can hear you say. “Have global financial conditions not been easy since the start of the year?” Yes, but there are two risks coming down the line at breakneck speed.

The first is the global reflation trade now under way. While SA’s steep yield curve has provided a small amount of protection, investors are worried about a 2013 “taper tantrum” rocking emerging markets, especially the ones that haven’t got their fiscal house in order or are only recovering to low potential growth rates.

Something else has been stirring too, more quietly, but it will have a greater impact.

Rules being drafted now in Europe are cementing a trend among large global investors of being more conscious of the carbon content in everything they do. This has meant the carbon intensity of company equity and corporate debt has weighed on asset allocations (stopping many people investing in Eskom and Sasol for some time now). But increasingly we are seeing this lens also apply to government bonds.

SA stands out like a sore thumb with one of the highest carbon intensities of any major emerging-market index constituent country. This is a huge red mark that will lead to fewer buyers of local bonds as investors look to reduce the average carbon intensity of their portfolios.

There is a lot of selfcongratulations that Gold Fields recently completed a three-year licensing process for 40MW of self-generation. And the same will happen again when the Renewable Energy Independent Power Producer Procurement Programme bid window-five starts. Yet the problem is that these are inadequate, and a much faster and more credible transition is required. A new Integrated Resource Plan and an amended Schedule 2 of the Electricity Regulation Act are required — the latter was hinted at in the state of the nation address. But we shall watch in March if the government is stuck in the mud.

Global investors are crying out to buy SA green bonds, yet the market is virtually nonexistent and projected carbon intensity cuts are just too slow.

There are wider forces at play here that increase the urgency for difficult conversations and rapid decisions both on decarbonisation and fiscal priorities in a constrained environment. The risk is that SA’s bond market will fall between the gaps, forcing local banks and funds to try to pick up the pieces at the expense of wider growth.

Attard Montalto is head of Capital Markets Research at Intellidex, an SA research-led consulting house.