By Johann Els, Chief Economist, Old Mutual Investment Group
“It is time for us to sow the seed of renewal and growth.” This is how Minister Tito Mboweni started his maiden Budget speech on 20 February, revealing a tough balancing act against the backdrop of an increasingly challenging economic climate.
As far as National Budgets go, there were undoubtedly disappointing elements, with a higher deficit and debt ratios, as well as an upward revision in Government’s expenditure ceiling and an increased tax burden for individuals. However, it also revealed that support for Eskom will be rolled out in a positive manner. The Minister’s strong statements on state-owned entities (SOEs) and the fact that Government will not be taking Eskom’s debt were further encouraging details to be announced by the Budget, as was the surprising reduction in the public sector wage bill and the emphasis on the private sector’s important role in Strategic Equity Partnerships.
The Minister focused his Budget on six key prescripts:
- Achieving a higher rate of economic growth,
- Increasing tax collection,
- Reasonable affordable expenditure,
- Stabilising and reducing debt,
- Reconfiguring SOEs and
- Managing the public sector wage bill.
The most noteworthy announcements were an unexpectedly strong statement on envisaged savings in the public sector wage bill, a R15billion increase in tax for individuals, no corporate tax changes and the fact that this Budget emerged as still very much expansionary, with total expenditure growth of 7.9% over the next three years and therefore real spending growth of 2.3% on average per annum.
But, it was the plans announced on Eskom that dominated the Speech overall which unveiled very strong and positive statements on support for the ailing SOE, as well as for a few other SOEs. The minister made some almost unprecedented statements about Eskom and SOEs in general, throwing out the difficult question of whether the country actually needs these enterprises, as well as saying that pouring money into Eskom in its current form is like pouring money into a sieve.
However, he made it clear that Government will not be taking on Eskom’s debt, rather focusing injecting R23billion per year into Eskom over three years. Importantly, he also announced the appointment of a ‘Chief Reorganisation Officer’ to implement the recommendations of the Presidential Task Team and set out that SOEs that apply for government guarantees for operational purposes will be required to also appoint a Chief Reorganisation Officer, in line with Treasury’s plans to tighten guarantee rules. All significant measures and indicative of a more deficit neutral Budget plan.
So what is the likely impact?
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. I do expect all three to be fairly hawkish in their post budget statements, but it’s unlikely that any of the agencies will make any ratings or outlook changes in the immediate short term. They will more likely adopt a wait-and-see attitude until after the elections, however, the risk of short-term ratings action remains very much alive though.
When it comes to market reaction to the Budget, the immediate focus was on the higher deficit and debt ratios and the increased tax burden on individuals. We already saw the bond and equity markets’ swift negative reaction upon the release of the budget, though both the rand and government bonds later regained losses. The Eskom and public sector wage bill announcements, as well as the tone of the speech – especially when read in conjunction with the 2018 Medium-term Budget Policy Statement and President Ramaphosa’s recent State of the Nation Address – is generally positive. This should help stabilise confidence and create an enabling environment for further policy measures post elections. I therefore expect both the bond and equity markets to eventually view the budget as neutral.
Against an already tough economic backdrop, the Budget is likely to have a negative impact for consumers, with the tax burden rising by R15bn (based on no inflation adjustment of tax brackets), and fuel levy and excise duty increases. However, overall, it will help in the process of building confidence and it is still an expansionary Budget, so it should therefore turn out to be mildly positive for the economy over the medium term. From an inflationary perspective, there will likely be very little impact as the increases in fuel and excise taxes are generally lower than last year. I also maintain that this still a very deflationary environment.
Lastly, there will be no direct impact on SA corporates through any budget-related policy changes, but the strong statements on Eskom, the public sector wage bill and the need to involve the private sector and create an environment where confidence should improve and enable the private sector to invest is clearly positive.
In summary, if you weigh up the positives and the negatives within the context of an enormously challenging economic climate, then this 2019 probably saw a more neutral Budget on balance. It was still a long way from perfect and there are still huge challenges ahead for the economy, but at least it wasn’t a pre-election giveaway Budget and Government is taking a tougher stance on key issues and making difficult decisions.