Budget 2021

OAM report: Mboweni's priority will be fiscal prudence

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Finance Minister Tito Mboweni is well known by domestic and global investors, having served as South African Reserve Bank governor for 10 years between 1999 and 2009. He has the right credentials for the job of Finance Minister, says Overberg Asset Management (OAM).

Mboweni, who is set to deliver his first Medium Term Budget Policy Statement (MTBPS), is unlikely to deviate from the budget projections made in the February budget.

In its weekly economic and market overview, OAM noted that fiscal prudence would be Mboweni’s priority.

"He is unlikely to deviate from the budget projections made in the February Budget, sticking close to the 2018/2019 Financial Year projected budget deficit of 3.6% of GDP.

"He will likely reiterate the 2019/2020 and 2020/2021 budget deficit targets of 3.6% and 3.5%, respectively."

Analysts at OAM believe that a positive MTBPS, championing fiscal prudence, a deficit neutral Infrastructure Fund and some indication of longer-term structural reform, would be rand positive; while ensuring South Africa maintains an investment grade rating from Moody’s.

South Africa economic review

• Mining production slumped in August by 9.1% year-on-year, following a 4.1% contraction in July. On a month-on-month basis mining production fell by 1.2% building on the substantial 8.3% contraction in July. It was a broad-based decline across mining sub-sectors, with coal and manganese the only sectors posting year-on-year growth, of 2.8% and 0.2%.

The biggest culprits in the decline were iron ore and gold, which tumbled 19.9% and 15.5% on the year. Together, they contributed 4.8 percentage points of the aggregate year-on-year mining production decline. The production of platinum group metals fell 7.0% on the year, detracting a further 1.7 percentage points from mining production.

The mining sector, after years of steady decline, now only accounts for around 7% of national GDP. Greater policy certainty and the introduction of attractive investment incentives are required to boost the mining industry.

• Retail sales growth unexpectedly accelerated in August to 2.5% year-on-year up from 1.4% in July despite the lack of jobs growth and the impact of rising fuel prices. The relatively upbeat retail sales numbers are attributed to the boost to household disposable income from the public-sector wage settlement earlier in the year.

On a month-on-month basis, retail sales grew by a solid 0.6% although down from the 1.5% gain in July. By retail category, the textiles, clothing, footwear and leather goods sector grew sales by 6.0% on the year up from 3.1% in July. Household furniture, appliances and equipment sales increased 10.4% up from 6.8% the previous month, while sales of pharmaceuticals and medical goods, cosmetics and toiletries accelerated from 2.1% to 3.1%.

Retail sales growth is expected to continue its modest but steady improvement in the second half of the year, helped by the expected stabilisation in the rand and international oil price. 

The week ahead

• Consumer price inflation: According to consensus forecast consumer price inflation is expected to have moderated slightly from 4.9% year-on-year in August to 4.8% in September amid lacklustre domestic demand and negligible inflationary pass-through from the weaker rand.

• Producer price inflation: According to consensus forecast producer price inflation is expected to have fallen quite sharply from 6.3% year-on-year in August to 5.8% in September, helped by the base effect of elevated fuel prices in the comparative period last year. Falling inflation at the producer level bodes well for consumer price inflation.

• Medium Term Budget Policy Statement: Due Wednesday 24th October. Finance Minister Tito Mboweni will present his first Medium Term Budget Policy Statement (MTBPS) on Wednesday.

Fiscal prudence will be Mboweni’s priority. He is unlikely to deviate from the budget projections made in the February Budget, sticking close to the 2018/2019 Financial Year projected budget deficit of 3.6% of GDP. He will likely reiterate the 2019/2020 and 2020/2021 budget deficit targets of 3.6% and 3.5%, respectively.

• South African Investment Conference: The conference, to be hosted by President Ramaphosa, will focus on new prospective investment pledges and plans to convert the $45bn in investment pledges, made so far, into concrete investment projects.

Over a thousand people are expected to attend the conference from around the world. However, the acid test is whether domestic savings can be mobilised into investment spending. 

Technical analysis 

• The spike in the rand/dollar rate to R15.50/$ in the first week of September may mark the peak in the currency’s recent decline.  

• The rally in the US dollar index has reached its medium-term goal suggesting a correction from current levels. The dollar remains below a major 30-year resistance line suggesting the bull run in the dollar may be over.

• The British pound has broken back below key resistance at £1.35/$ suggesting a trading range of £1.30/$ to £1.35/$. The £1.28/$ level is expected to provide strong resistance.

• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.

• The US 10-year Treasury yield has broken above resistance at 3.0% and 3.20%, paving the way for a new 3.20% to 3.30% trading range. However, any further move highly is likely to meet stiff resistance, especially at the key 3.50% level. 

• The benchmark R186 2025 SA Gilt yield has spiked higher to 9.30% but is expected to meet stiff resistance at this level, limiting any further likely upside. The R186 may retrace a portion of its upward move taking the yield back to the 8.80% level and thereafter 8.60%.

• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdaq and Russell 2 000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.  

• The Brent oil price has broken above key resistance at $80 per barrel, opening-up the $100 level, which just two months ago seemed far-fetched. However, any spike higher to the $100 level is likely to be short-lived, a blip rather than the start of a sustainable trend higher.

The outlook for base metals prices is less certain after the copper price retreated sharply from the key $7 000 per ton level. A decisive break below $6 000 per ton would herald a bear market in copper and base metals’ prices.

• Gold has developed an inverse "head and shoulders" pattern, which indicates a price recovery and a test of the $1 400 target level.

• Despite the consolidation since the start of the year the break in the JSE All Share index above the key resistance level of 60 000 in December signals the early stages of a new bull market.

Bottom line 

• Finance Minister Tito Mboweni will present his first Medium Term Budget Policy Statement (MTBPS) on Wednesday.

• Mboweni is well known by domestic and global investors, having served as South African Reserve Bank governor for 10 years between 1999 and 2009. He has the right credentials for the job of Finance Minister. Besides, he is one of the highest-ranking officials within the ANC, gaining the 11th most votes in his election to the ANC’s National Executive Committee at the December elective conference.

The rand rallied around 3% against the US dollar on the day of his appointment as Finance Minister, a marked out-performance of all other emerging market currencies on that day, clearly signalling the market’s approval of his appointment. The MTBPS is unlikely to be clouded by political hectoring, which is likely to have been the case, were Nhlanhla Nene still at the helm.

• Fiscal prudence will be Mboweni’s priority. He is unlikely to deviate from the budget projections made in the February Budget, sticking close to the 2018/2019 Financial Year projected budget deficit of 3.6% of GDP. He will likely reiterate the 2019/2020 and 2020/2021 budget deficit targets of 3.6% and 3.5%, respectively.

• The MTBPS will offer more insight into the funding of the Infrastructure Fund, which President Ramaphosa announced in September. Ramaphosa said the Infrastructure Fund, comprising R400bn in public funding, would not require new money.  Rather, as stated at the time of his initial announcement, an amount of R50bn would be reprioritised, with details to be disclosed at the MTBPS.

• Emboldened by his long experience in public service and his seniority within the ANC, Mboweni is expected to shed some light on longer-term structural reforms, especially relating to the heavy financial burden of the country’s state-owned enterprises.

His attention is likely to focus on the massive public-sector wage bill. Speaking at the Cape Peninsula University of Technology last weekend, he voiced his concern over public sector wages: "If we are better organised we should be making sure that we do not have a situation where R8 out of every R10 goes to salaries in the public sector. That means we are left with R2 for other services, to fix a clinic or hospital." 

• Moody’s, the last of the three major credit rating agencies still awarding South African with an "investment grade" sovereign credit rating, has postponed its semi-annual review until after the MTBPS, to assess any risk of fiscal slippage. A positive MTBPS, championing fiscal prudence, a deficit neutral Infrastructure Fund and some indication of longer-term structural reform, would be rand positive while ensuring South Africa maintains an investment grade rating from Moody’s.

For the full report, including a look at international markets, click here.

* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.

Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable, but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report. 

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

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