In his Budget 2019, Finance Minister Tito Mboweni is expected to reaffirm government's commitment to fiscal consolidation in a growth-constrained environment, according to economist Sanisha Packirisamy of Momentum Investments.
"Although the shaky financial position of SA's unstable state-owned enterprises (SOEs) are a key threat to longer-term fiscal sustainability, the timing of the national elections may delay the implementation of credible turnaround plans," she said in a statement.
In the October 2018 mini budget, Mboweni admitted "poor governance, reflected in inefficiency, corruption and financial mismanagement" reduced the impact of spending and increased pressure on the budget.
He noted that "government has begun the process of rebuilding important state institutions".
"In view of these strong statements, Mboweni is likely to mention, in Budget 2019, strides made in tackling corruption and investigating state capture in an effort to increase the productive use of taxpayer money," said Packirisamy.
In the view of Momentum Investments, a modest recovery in growth is likely in the near-term due to some governance and regulatory reform.
At the same time, it expects that politically unpopular reforms, which could steer the economy toward a higher growth trajectory, will take time to implement.
Momentum Investments also expects a downward revision to Treasury's inflation forecasts in the medium term.
Tax targets unlikely to be met
Furthermore, it foresees that Treasury's target for tax collection is unlikely to be met.
"This will require stronger departmental revenue growth to maintain the budget deficit targets, which were planned in October 2018," commented Packirisamy.
Corporate tax collections have been the biggest area of disappointment. At the same time, VAT collections have outperformed Treasury's expectations at 12.4% on a FYTD basis.
In the view of Packirisamy, an additional increase in the VAT rate would be difficult to initiate in an environment of low growth and cash-strapped consumers.
"Government is likely to keep expenditure growth below its self-imposed ceiling in its effort to stay the fiscal course," said Packirisamy.
In the mini budget, Treasury announced that it would reprioritise R32.4bn from non-performing areas. No further allocation was made to wage growth, and departments were forced to absorb the R30.2bn shortfall within their allocations, by managing overtime and performance incentives.
Packirisamy noted that government's wage bill swallows the largest share of the consolidated spending budget (35%).
Furthermore, SA's debt-servicing costs are the highest growing expenditure item in the budget. As a share of revenue, debt-servicing costs are approaching 15%, which is a key level monitored by the rating agencies.
Moody's previously said it was looking for a gradual recovery in the SA economy and it was taking a wait-and-see approach to land reform.
Momentum Investments expects the country’s sovereign ratings to remain steady in the near term, in line with a projected improvement in growth and fiscal dynamics in the medium term, but only if additional guarantees to ailing parastatals are granted on a market-acceptable conditional basis.