TITO’S VETO
What will get the chop on Wednesday?
● When finance minister Tito Mboweni makes his first budget speech in parliament on Wednesday, the tone he sets will be more important than the numbers he presents.
Ahead of the president’s investment conference, which starts on Friday, investors will be looking to SA’s new finance minister for a clear message that the government is committed to staying on the path of fiscal discipline in the face of deteriorating economic growth and revenue prospects and of populist pressure from within its own ranks.
The legacy of the Zuma years has left the Treasury with little room to manoeuvre on either the revenue or the spending side of the budget. Most taxes have been raised in recent years and many departmental budgets have been cut to make way for greater spending on free higher education.
Markets and rating agencies will be watching closely for signals that the government can continue to stick within its self-imposed expenditure ceiling, despite having to accommodate higher-than-budgeted public-sector pay hikes and possible bailouts for ailing state-owned enterprises, and at the same time shift up to R50bn of spending to more growth-friendly areas.
Wednesday’s medium-term budget policy statement (MTBPS) is expected to disclose details of the economic stimulus and recovery plan that President Cyril Ramaphosa announced on September 21.
The plan included a promise to “reprioritise” spending towards activities with the greatest impact on growth and job creation, as well as a package of reforms designed to boost investment and growth.
Mboweni, a highly regarded former governor of the Reserve Bank and former labour minister, was appointed to the finance minister post on October 10.
He would have had hardly a week to get up to speed on a host of budget information before the cabinet had to sign off on the budget by last week. He would not have been able to influence the numbers, which emerge from a lengthy process that starts in June each year in which the Treasury engages with departments over spending allocations and agrees the three-year budget projections with a ministerial committee and ultimately the cabinet.
Officials say Mboweni has already started to make his presence felt in the cabinet and other forums and has been much more forthright than some of his predecessors.
One senior banker describes him as a proud man who doesn’t like to miss targets — so chances are that he will want to ensure fiscal targets are met. In the current climate, that may be more important than ever — and more difficult.
Mboweni’s first budget speech comes at a time when SA’s sovereign bonds are rated junk by two of the three major rating agencies, with Moody’s the only one that has maintained an investment-grade rating.
That makes SA vulnerable to any further downgrades that could prompt capital outflows and put pressure on the rand. That’s especially so in a context in which foreign investors own more than 40% of the government’s local currency (rand-denominated) bonds while global investor sentiment towards emerging markets such as SA has turned negative this year.
Moody’s held back from updating SA’s rating on October 12 but warned this week that it would “likely be downgraded if it were to become clear that the government will not stabilise its debt burden and contingent liabilities from SOEs, and that prospects for a revival in growth falter”.
The agency cut its growth forecast for this year to just 0.5%, a third of what the Treasury had pencilled into its February budget numbers, predicting the fiscal deficit would worsen to just over 4% this year, missing the government’s February target of 3.6%.
Moody’s still expects, however, that the government’s debt burden will stabilise at around 56% of GDP and indicated that it could look to upgrade its rating if SA were to successfully implement structural reforms to raise potential growth, and stabilise and eventually reduce the debt burden, as well as reforming SOEs.
Since February, Ramaphoria has worn off and the economy has gone into recession, prompting economists to revise growth forecasts sharply downwards. The Treasury will have revised its forecasts of growth down too, and will have updated its revenue, deficit and debt projections.
Few in the market expect the Treasury to
The MTBPS is not likely to surprise the markets greatly, either for good or ill Peter Worthington
Absa Capital economist
Political pressure will ramp up … to abandon the expenditure ceiling and undertake a real stimulus
Peter Attard Montalto
Intellidex economist
be quite as pessimistic as Moody’s, though Citi economist Gina Schoeman says it is a question of what it is prepared to show: “They won’t be willing to put a four in front of the deficit number, maybe 3.8%-3.9%.”
Assuming the expenditure ceiling holds, the deficit and debt outcomes will depend on what happens to tax collections given the recession.
The large revenue shortfalls of recent years are not expected to be repeated, with collections for the first five months of the fiscal year to August running ahead of February’s budget forecasts. VAT collections are above budget even though corporate income tax is way below. But economists are divided on whether this will continue for the full year, with most predicting a small shortfall that could widen over the medium term if growth continues to disappoint and tax collection cannot be turned around.
“The upcoming MTBPS is not likely to surprise the markets greatly, either for good or for ill,” says Absa Capital economist Peter Worthington.
But a big question is what happens between the MTBPS and the February budget, in the run-up to the elections next year.
Intellidex economist Peter Attard Montalto says: “We think political pressure will ramp up considerably after the MTBPS to abandon the expenditure ceiling and undertake a real stimulus.”
But the message on Wednesday is likely to be that it’s not the fiscus that can fix SA’s growth and jobs problem. For that, deeper and more difficult reforms are needed.
Mboweni’s first test may be to message that.
When former finance minister Malusi Gigaba presented the medium-term budget a year ago it was more a train smash than a budget. Growth was way short of projections, tax collections over the next three years were expected to fall almost R200bn short, the national debt was going to keep climbing — but the minister offered no solutions. The response from rating agencies and the rand was swift and devastating. It was only in the February budget that the government began to undo the damage, taking advantage of Ramaphoria to revise up growth forecasts and implement tough tax and spending measures to get back on track towards stabilising debt, as it had long promised to do.
As SA goes into this year’s medium-term budget the political environment looks better, with a more growth- and investment-friendly president and market-friendly finance minister. Yet the economic environment is in many ways worse and the fiscal space far more constrained. Growth is much weaker — the economy sank into recession in the first half of this year. Moody’s last week revised its growth forecast down to 0.5% for this year and 1.3% for next, and though the Treasury is unlikely to go that low, it will have to slash its estimates of 1.5% and 1.8%, rising to 2.1% in 2020, on which it based its February budget projections.
President Cyril Ramaphosa has promised an economic stimulus package reprioritising up to R50bn of government spending on highimpact, job-creating projects. But there was already a huge reallocation of spending in the previous budget for the R67bn cost of previous president Jacob Zuma’s commitment to free higher education. The
Treasury will also need an extra R30bn or so to pay for the public sector wage deal that was above budget. Added to that is pressure to bail out state-owned enterprises which have new, credible boards but remain in crisis. And on top of spending pressures are rising interest costs for servicing the national debt. The government has promised to stick to its expenditure ceiling and rating agencies and investors are watching.
A key question is whether the Treasury has managed to slice and dice spending this time in ways that don’t damage service delivery and are positive for growth. Another big question is on revenue.
Unexpectedly, tax collections have been in line with budget projections for the first five months of this fiscal year — but will it last? The economy is one big factor; the state of Sars another. Moody’s expects another shortfall this year. Absa Capital economists Peter Worthington and Miyelani Maluleke estimate it could be anything from a slight overshoot to a R21bn undershoot.
It’s also the three-year outlook that is crucial to the bottom line and how finance minister Tito Mboweni’s first medium- term budget will play in the markets. The trick for the Treasury is to be realistic enough to convince, but not so realistic that it repels investors and makes it even more expensive to raise funds. Crucially, markets want to be convinced that the government has a plan to stay on the path of fiscal prudence and that efforts to deliver higher growth will yield benefits. Moody’s more pessimistic growth and deficit predictions may be the more realistic but they are at the bottom end of expectations. The Treasury will not want to be pessimistic at a time when the president is going for growth and investment.
Most economists expect relatively unchanged numbers but spending pressure will ramp up going into elections and February’s budget could be an even tougher one to craft. And while Ramaphosa’s promised reforms — such as in telecoms and mining policy — could well start to boost growth and ultimately tax revenues over the next 18 to 36 months, they are not going to be any short-term fix for the fiscal folk. Some combination of realism and optimism may be the best Mboweni can do for now.
The political environment is better but the economy is worse ahead of midterm budget