Cape Town – Finance Minister Malusi Gigaba’s upcoming mini budget delivery in a little more than three weeks is unlikely to appease ratings agencies, which have become increasingly sceptical about government’s ability to turn the economy and ailing state-owned enterprises (SOEs) around.
This is according to emerging markets economist Peter Attard Montalto of Japanese bank Nomura. He said in a company note that markets and ratings agencies had been lukewarm about the the 14-point plan announced in July.
The medium term budget policy statement on October 25 will be Gigaba’s first “fiscal policy outing”, Montalto said, which will be delivered against the backdrop of media coverage that National Treasury is “captured”.
City Press earlier reported that senior officials at National Treasury claimed that Gigaba is “capturing” the department, usurping the power of his director-general (DG) and establishing a parallel administration run by close aides in his office.
The fact that the broad strategy of expenditure determination has been moved to the Presidency under the Department of Planning, Monitoring and Evaluation (DPME) under Minister Jeff Radebe will see National Treasury losing some control and negotiating power, Montalto said.
The Presidency now has a much bigger hand in the budgetary process with the launch of a mandate paper which allows the DPME to identify and allocate spending priorities. This essentially means the budget process consists of two parts – a prioritisation process led by the DPME and the Presidency, and the budget allocation process led by the National Treasury, in consultation with departments.
Fiscal world view
Montalto is of the view that there is a lack of easy revenue hikes and expenditure cuts – “the low-hanging fruit are increasingly unavailable” - which will necessitate challenging decisions politically and logistically on Gigaba’s part.
“While we would not label the minister as a fiscal conservative, we think he can push to open up a politically useful space for more expenditure in some areas through offsetting expenditure cuts elsewhere, as well as [put] more pressure on revenue – especially with higher earners."
Nomura believes Gigaba has more political power than his predecessors Pravin Gordhan and Nhlanhla Nene in terms of his relationship with President Jacob Zuma.
Both Gordhan and Nene enjoyed a strenuous relationship with Zuma, which culminated in their removal from office in March 2016 and December 2015, respectively.
“That said, the politically charged environment of an elective conference (set to take place in December this year) and a national election in 2019 mean political space in which to operate are less than ideal," said Montalto.
“This can skew policy towards measures such as wealth tax and requirements to make space for broader access to free higher education.”
Market and ratings agency reaction
Montalto said one of the biggest challenges of the mini budget in recent years is the negativity that takes hold once the budget is dissected after the "PR spin" on the day subsides.
“This was true at the budget in February, when vastly overestimated buoyance numbers were only honed in on by the market a week or so later when the National Treasury roadshow took place,” he said.
According to Montalto, the markets give the country too much benefit of the doubt on the day when the budget is delivered and more scepticism is needed.
“This is particularly true of the continued promised SOEs turnaround and reform,” he said.
Nomura has attempted to give Gigaba the benefit of the doubt and understand his “fiscal motivations”.
“After all, Pravin Gordhan was not a fiscal conservative and also always did the minimum amount necessary on consolidation, which is not turning out to be insufficient. We therefore judge the (mini budget) on its merits, and not its personalities (though the politics surrounding those personalities clearly cannot be ignored)," said Montalto.
Although ratings agencies will comment on the evening after the delivery of the mini budget, the official ratings update for Moody’s and Standard & Poor’s only takes place on November 24.
“We expect all agencies to take a dim view of debt levels grinding higher and movement away from consolidation,” Montalto said.
Ratings agencies, however, will in all likelihood focus mostly on issues surrounding SOEs.
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