Maarten Ackerman, Chief Economist and George Herman, Chief Investment Officer, both at Citadel, unpack the Finance Minister’s latest Medium Term Budget Policy Statement (MTBPS).
In delivering his latest Medium Term Budget Policy Statement (MTBPS) today, Finance Minister Enoch Godongwana made a fair and balanced assessment of the economic risks facing South Africa and the remedies needed to address it, but once again, there was a risk that Treasury’s good intentions would be derailed in the implementation phase, analysts at Citadel have warned.
“The budget is quite well-balanced between social and investment spending priorities. One can’t say this is a purely populist budget. There was nothing that surprised or shocked the markets. But, whether we can get this well-crafted budget over the line at the implementation stage, to help the economy grow, and not lose much of it to inaction, mismanagement and corruption, is what will really matter in the months ahead,” said Maarten Ackerman, Citadel’s Chief Economist.
In listing the factors that impacted the economy, Godongwana mentioned global factors such as spiraling inflation, Russia’s war in Ukraine, supply chain interruptions, the global energy crisis and the after-effects of COVID-19. Locally, he listed rising unemployment and inequality, crime, corruption, loadshedding, national transport and logistics failures, and infrastructure damage caused by recent natural disasters, among other challenges.
INVESTMENT IN INFRASTRUCTURE CRITICAL
Godongwana said it was necessary to boost private sector investment, while building a strong developmental state that would drive more state-led investment. On the private investment side, he announced the lifting of private energy generation caps, a National Water Regulator to facilitate private sector investment, and improved procurement processes to stimulate business. On the state side, the government would increase its infrastructure spending from R66 billion to R125 billion by 2025-2026.
“Godongwana’s increased infrastructure spending will be positive for job creation and economic stimulus, but only if we can address current bottlenecks and flawed tender processes,” said Ackerman.
George Herman, Chief Investment Officer at Citadel, remains somewhat sceptical of the government’s continued talk of reining in its dysfunctional state-owned enterprises (SOEs) , including Eskom, Transnet, Denel and Sanral. “We hear it in every budget speech,” he said. Godongwana lamented the extent of corruption and mismanagement of public funds across the country’s municipalities, SOEs and other institutions, and announced strict compliance measures and conditions for further funding assistance.
One of the biggest positives that emerged were plans to drastically increase fixed capital formation spending by 70% over the next three years, but it would all come down to how that money was used, said Herman. “With the increased spending on infrastructure comes higher investor confidence which will eventually lead to lower unemployment and higher economic growth over time.”
GREYLISTING INEVITABLE BUT TREASURY FIGHTS BACK
Herman said it appeared unavoidable that South Africa would be greylisted early next year for failing to take enough steps against illicit money flows, but at least it appeared as if Treasury and Parliament were finally starting to take the right steps to get the country off the international Financial Action Task Force’s grey list fairly quickly and stem the inevitably negative impact this fate will have on gross domestic product (GDP).
The International Monetary Fund (IMF) recently warned that greylistings negatively impact legitimate fund inflows into afflicted countries. The resultant decline in GDP was recently seen in Mauritius, which was greylisted in February 2020 and later blacklisted by the EU as a high-risk country to transact with – leading to an estimated overall 1% GDP decline until its government’s concerted efforts to get it un-greylisted paid off in October 2021. “South Africa will have to do the same and really step up its prosecutions of financial crimes, such as corruption and money laundering, to get off the grey list quickly,” said Herman.
Herman and Ackerman were positive about Godongwana’s messages about South Africa’s need to reduce state debt, address fiscal risks, and stabilise government expenditure. “Revenue collections exceeded expectations, due to improvement in corporate income tax collections, largely thanks to the strong performance of the commodity sector. It’s positive to see that the finance minister was realistic about the fact that this windfall may be short-lived, and had the wisdom not commit this temporary surplus to recurring expenditure on long-term initiatives,” said Ackerman.
“I think overall the budget is conservative and the government is showing that they want to keep the house in order. They’re not overspending on anything just because there’s a little bit of extra money on the table. It’s 100% right that they are prudent and doing the best they can under challenging circumstances.”
From a country safety and security perspective, it was positive that Treasury was spending more on policing and prosecuting crime, as well as education and health – all things that in the long run would make South Africa a better place in which to live, work and invest, said Ackerman.
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