Supplementary Budget 2020

Alexander Forbes hails 'tough but realistic' Mboweni

Finance Minister Tito Mboweni's maiden Budget speech is a structural reform Budget, which aims to reduce the immediate fiscal and economic risks posed by Eskom and other state-owned enterprises' unsustainable balance sheets and operational models, says Isaah Mhlanga, executive chief economist at Alexander Forbes Investments.

"Without a doubt, the fiscal numbers show a marginal deterioration when compared with the 2018 Mini Budget, and slightly more so if we compare it with the 2018 Budget Review," commented Mhlanga.

The consolidated budget deficit for FY2018/19 slips to 4.2% of gross domestic product (GDP) from the 2018 Mini Budget's forecast of 3.6%, rising to 4.5% of GDP in FY2019/20 before moderating to 4.0% by FY2021/22.

The debt-to-GDP ratio now stabilises at 60% of GDP in FY2023/24, which is slightly higher than the 59.6% previously projected.

'Necessary slippage'

"These decimal points' deterioration in fiscal numbers, in our view, are a necessary slippage to allow reform packages that will create a more stable and predictable operating environment," said Mhlanga.

"Our overall assessment is that this was a tough budget, but it is realistic, and addresses the risks posed by Eskom and a large public sector wage bill."

Alexander Forbes Investments does not expect Moody's to change the Baa3 credit rating, nor the stable outlook this March, when it reviews South Africa's rating.

Short-term challenges

"This budget sets a good base for stabilising the local operating environment that will enable a conducive investment climate. However, the short-term outlook will remain challenging on account of still weak economic growth environment, implying little recovery in corporate sector profitability, which in turn translate to potential job losses," said Mhlanga.

"Over the longer term, we believe that the focus on infrastructure investment will provide more opportunities to diversify into private markets, thus enhancing return expectations or providing protection for future traditional asset class return downturn."

Mhlanga said that, to be conducive, stable and predictable, the economic environment would require security of energy and a capable state, among a host of other regulatory reforms.

In this respect, R69bn in Eskom funding for the next three years, to facilitate its restructuring, would be required to help reform energy sector.

"What is more encouraging is that any funding request from other state-owned enterprises, including SAA, the SABC and Denel, will be achieved through the sale of non-core assets. Over the short term, any funding pressure will be relieved from the contingent liability reserve," said Mhlanga.
 
He also noted savings on the public sector wage bill.

"In this budget, National Treasury has budgeted for a R50.3bn decrease in public spending, largely reflecting a decline in the salaries and wages due to natural attrition and early retirement without penalties. Treasury projects that it will achieve cost savings of R47bn over the medium term on the wage bill," commented Mhlanga.
   
"Given the weak economic growth, there are no adjustments in the main tax revenues – personal income tax, VAT and corporate income tax. This will help in cushioning consumers who have seen an increase in the cost of living for the past couple of years."

Disappointing

Johann Els, chief economist of Old Mutual Investment Group, describes Budget 2019 as "disappointing", but sees the support for Eskom as done in a positive manner.

For him the negative aspects from the Budget are higher deficit and debt ratios; upward revision in the expenditure ceiling; and an increased tax burden for individuals.

On the positive side, he mentions the strong statement on SOEs and no Eskom debt take-on; the reduction in the public sector wage bill; a continued emphasis on the private sector's important role and strategic equity partnerships.
 
"Despite the upwards revised expenditure ceiling and budget and debt ratios, Moody’s (as well as S&P and Fitch) should view the Eskom measures as positive," said Els.

"I do expect all three to be fairly hawkish in their post budget statements, but do not expect any ratings or outlook changes from any of the agencies in the immediate short term. They will likely adopt a wait-and-see attitude until after the elections. The risk of short-term ratings action remains very much alive though."

Expenditure ceiling

The Organisation Undoing Tax Abuse (Outa) is concerned that the expenditure ceiling was not revised downwards significantly, instead going up by another R16bn over the next three years.

"Although this takes into account the unplanned R69bn help for Eskom, it is a worrying indication that Government is not doing enough to reduce unnecessary spending and losses due to corruption and maladministration," Outa said in a statement.

"This ceiling used to be the primary fiscal anchor and it is no longer adhered to."

Furthermore, Outa's view, the tactical delay in reconfiguring the SOEs means that "more money will be lost while the new chief reconstruction officers are installed and take time to make much-needed plans for change".

A positive for Outa, though, is that Mboweni has changed his narrative on the e-toll issue, from a hard "e-tolls are here to stay" stance last year to an indication that negotiations for solutions to resolve the e-toll matter are on the cards, says Outa CEO Wayne Duvenage.

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