Economic takeaways from MTBPS 2021

To persuade private-sector investors, the government needs to demonstrate implementation of economic reforms that reduce the cost of business: Alexander Forbes chief economist Isaah Mhlanga.

FIFI PETERS: Moneyweb has asked some of the country’s top economists to rate Finance Minister Enoch Godongwana’s first medium-term budget speech.

To give you an indication of some of the responses we’ve received, Adrian Saville has given the minister seven out of 10; he’s an investment specialist. Kevin Lings, the chief economist at Stanlib, has given the minister six out of 10. Lumkile Mondi, a lecturer at Wits, rated the budget with a seven. And we also had Tabi Leoka, an independent economic strategist, who gave the minister a nine out of 10.

Right now on the Market Update we’ve got the chief economist of Alexander Forbes, Isaah Mhlanga, to give us his view on the budget, as well as the score. Isaah, thanks so much for your time. Most of your colleagues are scoring the minister quite favourably. What score would you give the minister out of 10?

ISAAH MHLANGA: I would give a rating of eight out of 10, for the simple reason that a lot of what we’ve been saying we need to see in the budget was there in the budget. Spending is being restructured towards investment, which was in the projections for gross capital formation. Away from current spending, which was also in the projections for government consumption which we see for the next three years, there’s a contraction – a reversal what we have been seeing in the three years before the pandemic, where government spending has been growing positively for three consecutive years.

So for me it’s really an eight – balancing the immediate needs, but taking care of the medium to long term.

FIFI PETERS: We’ve got a bit of a clip of what the minister had to say a little earlier. Let’s just listen to it. I want to ask you a question on the other side of it.

ENOCH GODONGWANA: Critical to the fiscal path we’ve chosen is the need to be clear and unambiguous on the trade-offs we are willing to make as a nation. We cannot do everything we want at the same time.

FIFI PETERS: That’s the minister talking about the fact that there would be opportunity costs involved in the path that he and this government have decided to take. So can you just give us a reflection on the priority areas that the minister has listed for the economy, and what the costs of prioritising on those specific areas could potentially be?

ISAAH MHLANGA: Maybe let me give you an anecdote of something that happened when we went to the lockup. We were used to a buffet of lamb chops, chicken meatballs, fruit salad and a variety of drinks, and cake for dessert – before the pandemic.

FIFI PETERS: Under which finance minister?

ISAAH MHLANGA: That’s what you get in the pre-pandemic budget with Minister Tito Mboweni, and pretty much all of them before him. But today we were welcomed with something that is very different – a cheese sandwich, an orange yogurt, a chicken wrap and a Lunch Bar. That is a downgrade from the menu that we were used to. But they haven’t cut everything. They still maintain a decent menu. That is, you know, something that is similar to the budget that was tabled by Minister Godongwana. They continue to reduce government spending, but they’re not cutting the absolutely necessary expense-line items. But they are still saying ‘we are on a fiscal consolidation path’ – the same that was tabled by Finance Minister Tito Mboweni in February.

Just to use an anecdote from Minister Godongwana, he said the only difference between him and Minister Mboweni is that he has better shoes. Also, if you look in terms of the revenues, he does have better revenues that Mr Mboweni had. Remember in February Mr Mboweni had about R100 billion in extra tax revenues. Minister Godongwana now had R120 billion in extra tax revenues relative to the February budget. That means there was some room to manoeuvre, and particularly to take care of the unbudgeted spending on the riot relief of the R350 which was implemented following the riots in July and also the third wave, but also to take care of the wage settlement of about R20 billion that was given as cash gratuities to public-sector employees. That now taking care using this extra tax revenue.

So it’s really a relief to the finance minister which would have been a pain if we hadn’t got the extra tax revenues.

FIFI PETERS: Well, I think the former finance minister also had a finer menu than his successor. I would choose lamb chops over a cheese sandwich any day. But nonetheless, jokes aside, the minister emphasised to great length that this is a pro-poor budget, given that 60% of the spending is allocated to social reforms in the form of housing, health, education, social grants and the like. But is this a pro-business budget that will get business to invest in this economy and make it grow?

ISAAH MHLANGA: Indeed, if we look at the numbers, but also if we look on the reform side, it is business-friendly. You normally need first to see the public sector investing in infrastructure before you can see the private sector invest. As I indicated, if you look at the investment-line projection, it [has been] growing for three consecutive years. That needs public-sector investment that is embedded in that forecast, which should be positive for the private sector.

But also look in terms of the growth story that underlies much of the projections going forward. It is in the reforms that were highlighted in the budget. A number of them are earmarked or scheduled to be implemented in 2022. We can talk about water, we can talk about spectrum, we can talk about Transnet’s rail being opened up to third-party players so that they can also run their wagons on the existing rail lines that belong to Transnet. That should be able to increase the volume and capacity of goods that are shifted from road to rail as they go to the export markets. That is one of the pain points that many big corporates, such as car manufacturers have been complaining about. So that is investor friendly – to say we are reducing the cost of doing business and we are putting [down] a timeline of implementation, on top of which we can then measure the success or failure. And 2022 is not that far, just a month or two away. So we will be able to measure whether they’re able to implement or not, which is going to build confidence if they are about to implement.

FIFI PETERS: Not to mention Eskom and some of the things that the minister had to say there. But Isaah, to your point of infrastructure being at the heart of growth for this economy from Covid-19 and even beyond the pandemic, what the minister also mentioned was the funding gap of around R441 billion regarding the projects on the table. Given that you have identified this as a business-friendly budget, how confident are you that the private sector will come to the party to plug that funding gap?

ISAAH MHLANGA: That is still a work in progress because most of business and the investors are going to wait for implementation before they plough their billions into infrastructure. So what government needs to do, which is what we’ve been saying for some time, is they need to demonstrate implementation of economic reforms that reduce the cost of business.

So until we see that implementation in 2022 as put in the budget, we are unlikely to see investors coming to the party. They will remain on the sidelines. Again, you can look from a growth point of view: from 5% this year, which is really much of the best effects, but also commodity prices, 2% next year and below 2% the year after, that is very mediocre economic growth to encourage the private sector to come and invest.

That’s why structural reforms, particularly the ones that were listed in the budget, are so important to implement because that is what is growing sentiment – to say the growth outlook is going to improve above 2%, and therefore there is now something that we can get in terms of profitability. That’s why we would then see private-sector investors coming to the party.

FIFI PETERS: All right. And of course a stronger economy is going to change the menu that you receive at the lockups. Mr Mhlanga, we’ll leave it there for now. Thanks so much. That’s the chief economist of Alexander Forbes, Isaah Mhlanga.

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