Budget 2022

Markets likely to be disappointed, ratings downgrade could be 'close call' - financial analysts

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Although the mini budget delivered by Finance Minister Tito Mboweni in Parliament on Wednesday can be seen as an honest reflection of the situation in South Africa, it may continue to be "slightly disappointing" to the market, according to Kwaku Koranteng, head of institutional business at Absa multi-management.

"Government is committed to clamping down on corruption, inefficiencies and restoring state-owned entities to health. We, however, foresee that the market may be slightly disappointed," said Koranteng, after Mboweni presented his maiden medium-term budget policy statement, or MTBPS. 

"The MTBPS adopted a weaker macroeconomic backdrop as expected, but we think the National Treasury’s nominal gross domestic product projection could still be too high.

“We are at a crossroads,” Mboweni told Parliament on Wednesday. “We must choose a path that takes us to faster and more inclusive economic growth and strengthens private and public sector investment."

The rand reacted negatively in the wake of the budget. It was trading 1.61% weaker at R14.48/$ at 17:58. 

Growth downgrades 

Treasury now expects real GDP growth of 0.7% in the 2018/19 financial year, compared to Absa’s own forecast of 0.4%. SA’s GDP growth has averaged just 1.8% over the past decade. 

"Deficit targets and the debt trajectory are now quite a bit worse than envisaged in February, and debt to GDP is now projected to peak only in 2023/24," said Peter Worthington, a senior economist at Absa.

To Worthington, the expansion of the list of zero-rated VAT goods is very marginal. Mboweni announced that Government will zero-rate white bread flour, cake flour and sanitary pads from April 1 next year. 

“The tenor of Mboweni’s speech was notably more robust than the MTBPS itself and suggests that he may push for a stronger policy stance in the 2019 Budget,” commented Worthington.

For Nazmeera Moola, deputy managing director at Investec Asset Management, at first glance, Mboweni’s maiden mini budget does not paint a pretty picture. She went as far as to say the market was likely to "hate" it.

"The headlines in particular are dreadful: the consolidated deficit rises to 4% this year, raising the spectre of a Moody’s downgrade, debt issuance over the next three years rises by R55bn and debt only peaks in 2024/25," said Moola.

She agreed with Worthington that Mboweni’s speech was far stronger than the actual policy statement. For example, he discussed in detail the weakness of GDP growth that resulted in Treasury’s growth downgrades and the structural requirements that are needed to resolve the growth profile.  

Mboweni had emphasised the bloated public sector wage bill that must be reined in and talked about the need to restore confidence and strengthen institutions.

"The ultimate key to success and stability is growth. Growth will create jobs, boost government revenues and stabilise the fiscus," said Moola.

Ratings downgrade may be a close call

Annabel Bishop of Investec said while Mboweni's focus on economic growth, business confidence and infrastructure investment was "needed", it came with a projected deterioration in government finances. 

This, she noted, was occurring at a time when ratings agency Moody’s has warned against the slippages in SA's public finances. Moody's is the sole ratings agency to have SA at investment grade. 

"Moody’s recently released a regular update on its credit opinion of South Africa, warning of a rating downgrade if South Africa fails to stabilise its debt, lift economic growth [or] ... [if] it sees an increase in the likelihood that SOE contingent liabilities will lift its sovereign debt burden.

"On the positive side, the strong commitment to tackling corruption, repairing governance of both key SOEs and of weakened state institutions, along with a determined focus on improving economic growth, boosting business confidence and infrastructure expenditure, will be credit positive, and in that, argue against a Moody’s downgrade," she said, adding it would be a close call for SA.  

Reza Hendrickse, portfolio manager at PPS Investments, said in a statement that while the policy statement may have been “light on intervention”, it should still be sufficient to appease the ratings agencies for now.

Mboweni, at a post-mini budget briefing, told journalists that markets may have "misread" the section in the speech about the impact of tightening monetary policy in the US on emerging market currencies.

Nedbank Group's Economic Unit commented that the government is placing its hopes on crowding-in private sector funding and expertise by leveraging its existing infrastructure budget over the medium-term framework.

"It is also hoping that measures to improve policies and policy certainty in critical sectors will help boost investment and economic growth," the unit said.

* Visit Fin24's 2018 mini budget hub for all the news, views and analysis.

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