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#Budget2020 unpacked

Annabel Bishop, Yolandi Esterhuizen and Matete Thulare report on their reception of Tito Mboweni’s budget.

CHRIS GILMOUR: I’m joined in the studio now by Annabel Bishop, chief economist at Investec – you and I have shared the odd panel discussion before – and Yolandi Esterhuizen, compliance manager at Sage Africa and Middle East in the studio here. And we have another guest on the line, Matete Thulare, business analyst at RMB. So we’ve got a full house.

We’ve been talking about the budget now for the past three hours or so. It’s been, generally speaking, I would say, pretty well received by, if I can put it, the private sector. We’ve just had David Shapiro talking about the markets, which look like they took it rather well. But the one big thing – and I’ve just been talking to a union person – is the wage bill. I think it’s going to be a rocky ride for the next few weeks.

ANNABEL BISHOP: I agree with you, and I think that the years of calm that we’ve had with labour relations are probably now coming to an end. Sadly in 2012 we saw the terrible tragedy of Marikana, and we’ve since seen a real damping down of labour unrest. And of course with Cosatu first off the bat, with negative criticism of this budget, they are extremely unhappy. And one of their big gripes is very much that they feel they are being made to pay for corruption. I suppose from that perspective they feel that the outlays for Eskom and SAA reflect that.

Very much a balancing act between clawing back money from their increases. Sadly, many of them are above inflation and needed to be clawed back anyway, because we’re in a very dull economic environment – economic growth likely risking close to 0% last year, maybe 0.3% as the budget says. And looking forward he really couldn’t raise much on the tax front. So we had to basically cut expenditure if we were going to avoid a Moody’s rating downgrade, if we were going to manage to have a fairly successful budget, one that wasn’t just a total waste of time. So this is where we sit.

CHRIS GILMOUR: Yolandi, as we sat here this afternoon and Tito started speaking, I looked at this and I thought, hold on, no tax increases – what’s going on? And then Azar Jammine said, no, hold on, it’s coming in the expenditures. He was absolutely right.

YOLANDI ESTERHUIZEN: I must admit I was very surprised. I was the one saying there will definitely be a Vat increase. I know Annabel did the exact opposite, and she won this round, absolutely. But I thought there was going to be a Vat increase, and definitely tax increases due to the deficit. And I’m still curious as to how we going to make up the deficit – or it feels like we’re going to play a catch-up game without any additional revenue to catch up on that, and to solve that major issue that we have. So I was definitely surprised about that.

The sin tax and all the additional ones – that was quite obvious. We know it’s coming every single year, but the usual suspects.

So it was an uneventful budget speech, in a way, because we expected so much more. It feels like it was a thin budget speech – to put that way.

CHRIS GILMOUR: We timed it – it was a 55-minute speech. It was one of the shortest speeches I can ever remember.

Matete, the $64 000 dollar question, or the R259 billion question – is this going to help to stave off a Moody’s downgrade, in your opinion?

MATETE THULARE: I think, if anything, it was quite an interesting budget, given the fact that ahead of the project we’d seen the rand touch around R15.35/dollar levels. There was some sort of positive market response to the budget, and now we’ve seen the rand pull back by like  percent.

But I suppose the best thing for Moody’s is the big “I”, which is implementation, just as one of the panellists just said. They are alluding to the wage bill being trimmed by around R160 billion over the next three years, but if the tension between the unions and government does not simmer, and with what Cosatu has actually issued as a statement, obviously being angered, I think the risks of Moody’s looking at this thing and saying hold on, we’ve been in this situation, we’ve seen this movie play itself out. Do they give us another reprieve for us to really implement what we’ve struggled to implement over the past couple of years? That’s quite interesting. But I mean Minister Tito Mboweni did allude to the fact that he doesn’t believe that Moody’s will downgrade us. He believes that the wage [entity] will be understanding of our plans as a country to reduce some of those deficits.

So it will be quite interesting to see just what they announce on March 27 . But as a house here at RMB we think, base case, they’ll most probably downgrade us in the early part of next year.

CHRIS GILMOUR: Okay, as we were going through this thing, I thought to myself I’ve seen this movie before. Back in the 1970s in Britain you had the three-day week, you had power strikes, you had the unions exerting huge control over the economy, and it was just one recession after the other. And then you reached a point in the late 1970s with the Winter of Discontent, and then you had this massive confrontation between the labour government and the unions. The unions lost when a woman called Margaret Thatcher came on the scene.

Now, I’m not suggesting we’re going to have anything like that, for goodness sake. That’s not even a remote possibility. But are we looking at the possibility, for the first time that I can remember, at least, of having a confrontation between the ANC and the unions over this particular issue?

ANNABEL BISHOP: I think so, because surely today’s budget would have been seen by the president before it went out. And of course that means then that the ANC would have obviously been fairly aware of what’s going on.

And the perhaps stranglehold that the labour unions have seemed to have had on government expenditure in  South Africa, on salary wage increases, it is very much reflective of the general input that you get across the board from political players in the South African economy. Everyone’s meddling in government finances, everyone’s providing very strong opinions, and of course that makes a very muddy difficult environment. We’ve reached a political gridlock for many of the reforms being passed. Of course the rating agencies are very aware of this.

And the fact that we are now taking a stance – not in full, but certainly it great part – looking to pull back on planned expenditure for civil servant salaries and wages, does indicate some sort of sea change. It’s just not the easy-going landscape that we saw under Zuma, which put us in this mess. We must understand that taxes increased dramatically in the last decade under Jacob Zuma, as government finances fell apart and deteriorated. We forget that we inherited a budget surplus, almost, when Thabo Mbeki was pushed out Zuma came in. And of course our debt projections were below 30%. That’s more than doubled now.

And if we don’t actually pull back, it’s not just about getting a Moody’s downgrade or not. That’s actually not the be-all and end-all. The fact is that we will continue falling down the credit-rating ladder, until we hit the C grade, which is just before default – and that’s when you put your hand up for an IMF loan.

What’s perhaps more relevant is what Fitch and S&P think of us, not just Moody’s. They are looking to downgrade us further, a negative outlook, and that really means that we’ll start to run through the BB categories; after that you go to single Business, and then you are in C territory. Something has to be done to stop this eventual decline, and we’ve really had a substantial decline already.

If not, then that is a trajectory we must make peace with. If we have identified what our biggest expenditure cost is, we must either pull back on it or not. The fact of the matter is the private sector has not seen increases above inflation in South Africa – in fact, many companies aren’t giving increases at all. You actually getting a lot of salary cuts, just so people can keep their jobs. Why the civil service thinks they are any different, or parastatals, clearly they’re not keeping up to date of what’s happening in the private sector

CHRIS GILMOUR: Okay, so this is going to have to be a sea change. Yolandi, if you go back a couple of years – and I was chatting to the representative from Fedusa about this a few moments ago – we had Eskom saying a 0% increase to their employees, and then Pravin Gordhan came in and just snafu’d the entire thing by saying no, no, we’ve got to have wage increases. Is everyone singing from the same song sheet in the ANC, do you think?

YOLANDI ESTERHUIZEN: Oh, I’m not sure. It’s obviously such a difficult thing to comment about, and I’m sure Annabel – I’m not an economist, though – will be able to shed some more light on it. But I doubt that they are all speaking from the same mouth, and we have the same ideas. Yes, it’s a difficult time, I think, that we all face, and we are all going through. Difficult times lying ahead.

CHRIS GILMOUR: Okay. Let’s move on from the wage bill side, because that seems at this point a fairly intractable problem.

Matete, we heard about it in Sona, the establishment of a sovereign wealth fund, and a state bank. Well, let’s leave the state bank aside for one moment, but a sovereign wealth fund – is this a practical solution for a country that’s got a 6.8% budget deficit?

MATETE THULARE: Well, it’s quite interesting – the establishment of the sovereign wealth fund that the president touched on. But to just quickly go back on the politic side of things, and then I’ll come back to the sovereign wealth fund – I think what will be most critical with regard to the unions and government at this point in time is who will be sitting around the table negotiating what the unions, in terms of all the salary freezes. Is it President Ramaphosa, given his background in the unions, and Tito Mboweni, given his background in labour, is it also Pravin Gordhan – who actually sits around the table and negotiates with the union to make them see the light, and obviously for us to see some sort of contemplates with regard to that? Remember, from a political point of view it’s local government elections next year and it’s also the ANC’s national general council in June later this year. So that is going to be quite interesting.

But when you look at just a sovereign wealth fund, Tito Mboweni did allude to the fact that there’s going to the sale of all this broadband spectrum, and obviously looking at selling some of the petrol royalty gas and mineral rights, and the sale off of non-core assets to establish this R30 billion wealth fund, and obviously the legal framework around all of this will be submitted tp parliament. It is quite interesting. We have heard some of the position members talk about the establishment of a sovereign wealth fund. It is going to be another case of how do we implement it, is it really be implemented, or is it just a case of them trying to tell us another story to do that.

CHRIS GILMOUR: Yolandi, on the tax front, there were a couple of things in there. One is the transfer of duty rising from R900 000 up to a million, the threshold, should I say. And the other thing was tinkering with the so-called expat tax. In my opinion, it’s a tax that shouldn’t be there in the first place. But, be that as it may. Where’s that coming from? Is this a kind of tacit admission that perhaps this should never have happened in the first place, and they’re trying to placate a lot of some of those people who are currently working overseas.

YOLANDI ESTERHUIZEN: It’s such a contentious issue, and there is so much unhappiness out there because of that so-called expat tax. Previously all the amounts were exempt if they complied with certain rules and met certain conditions—

CHRIS GILMOUR: 183 days out of the country.

YOLANDI ESTERHUIZEN: And the 60 continuous days. And now suddenly the exemption was limited to only R1 million. For somebody working abroad, they could easily exceed that R1 million – almost immediately.

So there was a lot of unhappiness. But we saw that that was not going to be changed in the actual legislation. We had workshops and National Treasury and Sars had all these workshops to get input, but it was clearly not something that was going to be changed.

It’s only being implemented from the first of March, and already there’s been a proposal to increase that tax exemption, telling us basically that they know that that million rand will easily be exceeded and people are unhappy about it.

But what caught me in this budget speech is the fact that they said – and I know a lot of financial advisors or advisors, and there were also different opinions in the industry – they suggested financial migration, as recognised by the Reserve Bank. A lot of people actually followed that advice, and they saw it as being breaking tax …… with South Africa, that being an easy way. They don’t necessarily understand or realise that it depends on whether you’re seen as a tax resident and not just a financial migration, and so forth.

So, in the budget speech they have now specifically said that they are going to phase out financial emigration as recognised by the Reserve Bank. So I think we need a lot of clarity on that  still to see, yes, maybe people who were planning to emigrate or financially emigrate, how that will impact them and their plans. And I’m curious to see what’s going to be the process about that. We know they don’t want us to break any tax out of South Africa, because that will reduce our tax base. But we’ll have to see more practical guidance on that, and the practical location, and I’m sure there will still be an extreme uproar for all the individuals in the markets out there, and we’ll have to see how this is implemented.

CHRIS GILMOUR: And that’s something that’s going to be published in the next few weeks, I would imagine.


CHRIS GILMOUR: Annabel, the outlook for GDP growth – or a couple of things. He’s looking for 0.9% GDP growth. I thought that was optimistic.

ANNABEL BISHOP: I think it is optimistic. I actually anticipated – or maybe anticipated is the wrong word – but certainly thought they may possibly revise it to 0.7%. You know, 0.8%, 0.7% is more the line of consensus. You might ask what the difference is – point one here, point one there? The bottom line is when you are close to zero point one actually matters quite a lot. And we can see that you know from the revisions in the expenditure, certainly, but particularly from the revisions to revenue. And of course those revisions to expenditure are coming about because there are revisions in revenue.

CHRIS GILMOUR: Yes, absolutely. And 6.8% budget deficit? This is a worryingly high figure.

ANNABEL BISHOP: It is, but there’s not much you can do about it, because it basically starts in a very short period of time. We’ve almost finished the 2019 tax year, so the next one is upon us, and you can’t change too much in such a short space of time, given the weak economic growth. A lot of the expenditures are already baked into the budget, so what you can see is those big expenditure reductions, particularly aimed at the civil service; above-inflation salary wage increases come at the end of the medium term expenditure framework period – they come in the last two years.

CHRIS GILMOUR: The one area that they didn’t spend a lot of time on in the budget speech – and I was quite surprised – was the big gorilla in the room, and that’s Eskom. Have you done any calculations on the cost of load shedding in terms of the hit to GDP growth?

ANNABEL BISHOP: I think it’s been estimated perhaps at around R9/10 billion a day, but that depends on what type of blood shedding you get, it depends if it’s your stage four, five, or six load shedding, or it’s a lot milder than that. We were estimating at the sort of the extreme end of last year.

But there are two major problems with Eskom. It’s not just their debt and the financial repercussions for the contingent liabilities of government thereupon, but also of course the supply of electricity in South Africa. And that’s where the budget did shine out. It supported the Sona, supported the independent producers coming on stream, it supported the purchases of this independent electricity production, and, in particular, really looking to start to lift the profile going forward to our electricity supply perspective. In turn that could help to foster economic growth.

I think this budget was not an austerity budget at all, but it’s very much a budget which tried to support economic growth, and that’s why we didn’t get these major tax increases – not even a failure to adjust for fiscal drag. For the first time in a while we actually saw fiscal drag adjusted for, and I think that was one of the surprises. Last time around we were surprised that they were going to do all the Vat refunds, now we’re getting surprised on the other positive with fiscal drag.

CHRIS GILMOUR: I was most taken aback, and positively so. Matete, reviewing Urba and practices in the auditing profession, I guess this was something that they threw in because they felt they had to have a bit of a go at the private sector as well.

MATETE THULARE: Yes. It was quite interesting, but I think another thing that really caught my eye, just for the issuance perspective, was the fact that they are starting to solve domestic Islamic bonds in the next fiscal year, and I think with this increase in the bid issuance it is trying to close this widening budget deficit. The other problem that we do have – as Annabel did touch on – is that obviously the borrowing programme over the few years just means that it’s going to increase something we saw things like foreign issuances in the dollar bond market increasing to around the $8.5 billion over the next three years. And obviously now to try and facilitate some of these infrastructure projects that you know President Ramaphosa did touch upon in a State of the Nation Address – they did say that they will be looking at borrowing from multilateral institutions to plug these gaps. So it just shows that if you are trying to borrow money, trying to issue debt, it just speaks to the point of the budget deficit increasing, which is quite worrying.

CHRIS GILMOUR: Okay, in the last few minutes, a minute each, if you had to give Tito marks out 10 for this budget? Annabel?

ANNABEL BISHOP: I feel round about 6.5/7 because, while I anticipated no Vat increase, or harm to the economy really from the tax front, I felt the expenditure cuts weren’t deep enough.

I say that quite candidly, because the fact of the matter is our fiscal deficit still rises, and our debt mainly, which we haven’t talked about, is unsustainable. And, of course, if you look at your debt at 71% of GDP by 2022/23, perhaps I should revise mine down to 4, to a mark of 4/10, instead of 6.5 to 7.

CHRIS GILMOUR: If you add it the state-owned enterprises, you are up nearer 80%.

ANNABEL BISHOP: So this is a problem. It appears a good budget on the face of it. When you actually delve down, that debt projections didn’t change means Moody’s is not going to take us off a negative outlook at all, and maybe not cut us to junk, or not to junk/sub-investment grade at the end of March. But certainly I think the risk is there for the remainder of the year, because Moody’s just wants to wait and see. We’re going in the right direction, we are improving very slowly. Will it continue, will it quicken? And if that doesn’t happen, then we’re in line either for the November period to see a downgrade, or else of course early next year.

CHRIS GILMOUR: Yolandi, 6.5 to 7, any improvements on that?

YOLANDI ESTERHUIZEN: I think for his sense of humour, 10/10. I really enjoyed that today. Content – let’s say 6. There were so many things that I wanted him to mention, to speak more about unemployment. That is a great concern in our country currently, and one of the biggest challenges that we are facing. So I would have wanted him, and I know they committed to set aside 1% of the budget to fund the employment initiative, or the presidential initiative as they call it, but I would have liked him to have mentioned more about that.

And then just another thing, NHI funding. We’re getting closer to the deadline or the implementation date, and we still don’t have details of the funding. It feels like every year it’s a one-liner or a two-liner just quickly about how there will be a reallocation of funds, and so forth. And today he said that that some of the actions might be postponed, to be rolled out a bit later. So it feels like the deadlines are becoming a bit tighter, and the funding.

So definitely a few things else that I wanted to hear.

CHRIS GILMOUR: Matete, what would you give him?

MATETE THULARE:  I’ll summarise and say 10/10 for the lady. An excellent job today. But also for Tito Mboweni I think a lot is expected for him. The market were expecting a lot, the individuals were expecting a lot, the economists were expecting a lot from him. I think we do know the dire situation that South Africa is in. Obviously the lower growth outlook, there’s nothing we can do about that.

But everyone is looking for their piece of what they were looking for. So I think with what he had at his disposal, I’d give him a 6/10. I think the only thing that is obviously worrying is the fact that, with our debt costs rising so much, at a certain point in time it’s going to lessen the capex and obviously impact service delivery. And I think the other problem is the fact that there is talk about cutting the wage bill. We know that it’s merely a proposal at the moment, and it’s nothing concrete. And, as Annabel says, the devil is in the detail. So once you delve more into detail, then you realise that there’s quite a lot that needs to be done from a government side of things than structural reform.

CHRIS GILMOUR: Fantastic. Many thanks to Matete Thurale, Yolandi Esterhuizen and Annabel Bishop for your valued imput.

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