Hard choices for Budget 2020

A strong Budget will come down to simple action and hard choices taken now for the long-term benefit of the country.
Finance Minister Tito Mboweni will have to present a credible plan to ensure SA doesn't lose its last investment-grade rating. Image: Moneyweb

The main thing to look at, given that the Moody’s is watching closely, is the need to rein in the budget deficit, which is starting to spiral even more out of control.

In the 2019 Medium Term Budget Policy Statement (MTBPS) the Treasury projected a consolidated Budget deficit of 5.9% of GDP, averaging 6.2% of GDP over the next three years.

A low growth, low inflation environment also affects the debt-to-GDP trajectory, the sustainability of which Finance Minister Tito Mboweni has already warned about. As a proportion of South Africa’s GDP, the MTBPS notes a hike in gross debt from 56.7% in 2018-19, to 60.8% in 2020-2021 and 71.3% in 2022-23 if the status quo does not change, something the rating agencies are understandably concerned about.

These numbers show that the previous goal of fiscal consolidation is currently not on target. Although it must be said that while Treasury appears to be doing everything in its power to stop the slow bleed, it’s a cooperation issue with the rest of government and other influential stakeholders.

The disconnect between what needs to happen and the disinclination within government to act is likely to come through when Mboweni’s National Budget is revealed next week. 

Revenue under pressure

Distilling the multiple issues at play, the government needs to find about R150 billion in savings over the medium-term expenditure framework, being the next three years. So that’s essentially R50 billion a year in savings that needs to come through.

But how can this be achieved?

Treasury could look, once again, to the taxpayer. But, with the taxpayer already squeezed, options are increasingly limited. In prior years, we’ve seen personal income tax hikes and last year a VAT hike. Easy wins are fuel levies and sin taxes that rise every year, as well as bracket creep, i.e. not adjusting the tax brackets for inflation. Other potential tax avenues could include a new upper tax bracket, wealth tax, estate duties or even changes to capital gains tax or dividend tax. Although helpful, these don’t really do the heavy lifting.

There has been talk that the only really effective lever left to pull could be to raise VAT by one percentage point to 16%, which would inject between R20 billion and R35 billion in revenue. Although it would be a particularly unpopular move politically, it is increasingly possible.

Expenditure in the crosshairs

Given the revenue constraints, all the hard work should be done on the expenditure side. But, again, taking steps to contain and curb expenditure will come down to political will.

The big line items here are public sector wages (about 34% of expenditure), debt service costs (10%) and social grants (10%). Interest payments and social grants are essentially fixed, leaving the wage bill as the main lever. This is a bit tricky at this stage since multi-year wage negotiations are still in process and will only conclude around March 2021, so we will watch this carefully.

The government tried a voluntary resignation and natural attrition approach to reduce the wage bill, but that hasn’t been effective. Maybe the lower inflation outlook from the Reserve Bank and pinning of inflation expectations might help in negotiating lower wage hikes, but that is unlikely to be enough.

Even if the government took a firm stance of CPI less 2%, which would have the trade unions baying at its feet, it would only save about R105 billion over three years, leaving us some R45 billion short. The point is that even a drastic decline in wage growth doesn’t result in sufficient scaling back in spending.

The SOE drag continues

Despite this constrained picture, there is still bound to be more budgetary support doled out for state-owned enterprises (SOEs) and this issue will loom large over Mboweni’s speech.

In late-January, we saw the Development Bank of South Africa (DBSA) grant a loan to South African Airways (SAA) as part of its restructuring. That represents a red flag in terms of the cross-contamination of SOEs, with a well-performing SOE such as the DBSA bailing out a poor-performing one. The government cannot afford to use its balance sheet to rescue these SOEs, so it is rearranging the deck chairs. Our concern is the strain this might put on the better-performing SOEs. For now, it might not be a big issue given that the DBSA does have rules governing its lending, but the trend isn’t pleasing.

Eskom is likely to remain both a concern and a drain. Clearly there is much in-fighting at the parastatal and disagreement about its turnaround direction coupled with bouts of load shedding, which indicates that South Africa is certainly not out of the woods. Eskom will, again, be a massive issue to watch for in the Budget. For at least the next few years, support will have to be pencilled in for the utility. If that number were to rise significantly or if there were further talk of taking Eskom debt on the government balance sheet, then we would be in deep trouble.

What could prove a fillip for the country would be positive developments around key issues such as power generation. There has been much talk about mining companies, and other businesses, being permitted to generate their own electricity and for independent power producers to come onto the gird, but we are yet to see formal communication in this regard. If something concrete is announced, even some compromise around public-private partnerships, then that would be very positive.

The D-Day downgrade

While the state fiddles, and South Africa’s economy burns, a downgrade in the country’s sovereign credit rating continues to hang over South Africa’s head. While the markets have long priced this in, the continued expectation that the axe will fall is, in itself, creating uncertainty and tension.

On January 28, 2020 Moody’s Investors Service analysts noted that it was “a bit early” to judge the impact of both policy and structural reforms. Lucie Villa, Moody’s lead sovereign analyst for South Africa, told Bloomberg that while the data was not pointing to either a particularly positive or negative direction, that “there is nothing really to flag for the time being”. This indicates that Moody’s may well be prepared to give SA more leeway, but obviously, the credit rating agency will be keeping a close eye on Mboweni’s Budget.

Certainly, everyone expects this Budget to be poor, but they might manage to demonstrate the will to cut expenditure and show just enough fiscal consolidation and, in that case, Moody’s might delay any decision until November, after the next MTBPS.

That said, while the government might do enough to keep Moody’s at bay for the first half of this year, it remains Citadel’s view that the agency will downgrade South Africa in 2020. While this would put South Africa out of the World Government Bond Index, Van der Westhuizen believes it is time for the country to take its medicine. Foreigners would come in and sell some of our bonds on index exclusion but, with some of the most attractive yields available, there would definitely be buyers stepping in. 

Reading the mood

Anyone who follows Mboweni on Twitter will be keenly aware that the finance minister is getting significant pushback, making him increasingly despondent with the lack of progress. There appears to be considerable opposition to his plans, as laid out in the economic strategy document released in August 2019.

At this juncture, even those plans might not be sufficient. There is no use putting a plaster on a bullet wound. Treasury knows what needs to be done, but the rest of the government needs to come on board, stop the wrangling, and make some tough decisions to turn the country around. Until they do, the economy will remain locked in a vicious circle of low growth.

Without cooperation within government and putting fiscal consolidation on the right path we can’t generate growth, which puts us into this death spiral,” he says. “Structural economic policy implementation and talk around that would be positive in the Budget. We’ve had all these plans, which are brilliant on paper, but the government still lags on implementation.

Navigating choppy waters

While many are trying to remain optimistic, a pragmatic and unemotional approach to the country and the fiscal state of the nation is essential at this juncture.

Mike van der Westhuizen is a Portfolio Manager at Citadel  

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COMMENTS   18

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“We’ve had all these plans, which are brilliant on paper, but the government still lags on implementation.”
There is NO implementation, just a host of plans, followed by more plans, followed by master plans, followed by renewed strategies, followed by job summits, followed by lekgotlas, followed by “war rooms”, followed by .. …..
All that happens is that the head honchos apologise to each other over childish remarks made during the recent parliamentary circus. So I suppose one could say that “apologies were implemented, but nothing else”.

The ANC are only good at Johnny Walker and talking not on walking the talk. There is never any proper implementation and the government has run out of debt runway to do the things they talk about.

The corrupt and looting government wants more from you and me.

Nobody wants anything from your black and empty tin!

Ai toggie. I don’t know what to say.
I was thinking about monkeys but we are not allowed to use that word anymore.

Nah – they will take the easy way out – Raise taxes – do not fire anyone and promise everything !!

Hard reality is they will continue to lose the very best of their upper and middle class taxpayers to countries that do not discriminate or punish them unfairly — Zim 2.0 unfolding !!!!

Many years ago an old gentleman said the following : Hulle gaan ons dood leef.

To add to Staalpen:

Population growth added an extra 15 million people since 94 plus about 4 million illegals, whilst the tax base has largely remained the same.

It is a major cause of the bad social conditions and unemployment but deserved no mention in the past 25 budgets.

Typical useless commentary from an SA economist.

An excited in-depth discussion about all the “options” that must be considered, and the tax consequences for this.

But it’s all superficial.

Because there’s a DELIBERATE exclusion of ANY mention of the root cause driving SA’s economic decline – an out-of-control population growth amongst the poor.

And they still berate our forefathers for building up the economy and being such racists.

A family has to live within its means – why not a country?
Therefore Tito needs to cut the spending !
You cannot keep borrowing indiscriminately. When the Economy ceases to grow
( as per S A) its anatter ofbtime before the poops hits the fan.

South African politicians and officials do not know the difference between a goal and a plan.
Free example:

A goal: We are going to generate our own electricity for the mines. This is a goal. You may also call it an objective. It is definitely not a plan.

A plan: Consists of a number of tasks, assigned resources, dates grouped by stages. It comes with a budget and a schedule. A plan for the goal above would consists of around 15,000 tasks, 500-800 service providers.

The difference has become academic. The horse has bolted. Ignore the sweet talk and pay attention to the actions.

The government and the people have chosen to go lower than Zimbabwe and stay there for longer. The dream is over. Make your plans accordingly.

These guys don’t understand project management. One of the tasks is to measure a deliverable and withhold payment if the deliverable is below specification. Just imagine how much could be saved if this were applied.

Underlying all of this is the fact that the country is in a state of collapse, as is the global economy.

Internationally it’s been propped up with unrepayable debt but this is an option we don’t have. Instead we have the own goals of ANC ideology.

None of this points to a future of any hope. The ANC always picks ideology over rational action and this budget is bound to be more of the same.

Tito will point out our dire situation and then….do nothing. Taxpayers will get bracket creep, vat, cap gains and rates increases while those on the government payroll are sheltered from external realities.

The private sector will shrink some more and those that can will get out.

What a way to run a country.

There is no need for your negativity and desperation. This country is dynamic and will thrive! And now there is the willingness from Government to succeed. Nobody needs your mental hopelessness. Either comment constructively or positively or don’t waste our time with your pointless commentary. Nobody needs the peanut gallery!

Need to know what you’re smoking. Must be the good stuff

End of comments.

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