The market’s response to Finance Minister, Enoch Godongwana’s Medium-Term Budget Policy Statement (MTBPS) on Wednesday afternoon was muted. This, however, was more an indication that the Minister delivered a MTBPS that was in line with market expectations, rather than it being positive.
The MTBPS is filled with a number of risks for the fiscus, and as the country heads into a pivotal election year in 2024, Godongwana left several important figures out of the budget, while still trying to show markets that Treasury is trying to rein in spending.
A FEW GREEN SHOOTS
- The economic growth assumptions were realistic and broadly in line with what the Citadel Asset Management (CAM) team has forecast for the next three years. Treasury has budgeted for an average growth rate of 1.5% per year for the next three years, marginally above CAM’s forecast of 1.3%.
- There also appears to be a serious attempt by Treasury to stabilise the country’s current fiscal predicament and the Minister was realistic about the challenges facing the fiscus.
- Godongwana mentioned improvements with regards to South Africa’s greylisting and noted that the country is making some progress in curtailing illicit outflows and funding of terrorist organisations with 17 out of the Financial Action Task Force’s 20 requirements already being addressed. However, until there are, inter alia, prosecutions of high-profile criminals, we believe South Africa’s greylisting will remain in place for an extended period.
- The Minister stressed that Treasury will not raise cash through the issuance of any more international bonds. We believe, however, that there is a risk of additional local issuances before the 2024 Budget, despite the Minister discounting this.
- A final positive is that Treasury is also not dipping into any of the country’s cash reserves to pay interest or fund the shortfall in expenditure, which shows it is being prudent in its approach to managing budgetary shortfalls.
THE STORM CLOUDS ON THE HORIZON
Despite the positives coming out of today’s MTBPS, there are numerous risks – some that the Minister acknowledged and others that were conspicuous in their omission.
The first major risk is that the country’s debt, as a percentage of the size of the economy, has jumped to 77%. While this is concerning, we would like to reassure clients that only if the debt to GDP ratio reaches around 90% of the size of the economy, will South Africa be at risk of entering a debt spiral. The concern about debt at these levels, however, is that the country’s debt servicing costs have been pushed to 23% of total budget expenditure, meaning that almost a quarter of Treasury’s total expenditure is going toward servicing debt, thus diverting much-needed funds from essential and productive spending and investment.
Another concern for Citadel is the increased levels of uncertainty around future government spending. While Treasury has accepted the increase in the public wage bill following February’s budget, the MTBPS did not factor in any future increase in wages. Also, Godongwana noted that the COVID-19 Social Relief of Distress grant will be extended to March 2025, which was not budgeted for in February’s budget, and will add roughly a further R30 billion to the country’s expenditure. There was no mention about any provisions being made for the National Health Insurance scheme, despite government going ahead with its implementation. And finally, there was no mention about any funding support to Transnet, which is critical for South Africa’s growth turnaround. These issues indicate that while Treasury is trying to rein in its expenditure, there seems to be no will from government to assist in this endeavour.
Another red flag in today’s budget was the debt write-offs that have been tabled for local municipalities, which Citadel believes creates a dangerous precedent for the future, not only for municipal compliance, but consumer compliance too.
NO WORD ON TAXES
The MTBPS is traditionally not the forum to mention any changes to tax legislation. It is our view, however, that the shortfall in revenue generation, will see Treasury turn to its tax base in 2024. We believe that there will be reforms made to tax legislation in the national budget, but we don’t know what they will be. We do expect that personal taxes will be impacted, while corporate tax rates will probably remain unaffected.
We will keep you posted on any changes to tax laws as and when they are proposed.
Ultimately a budget is about revenue and expenditure, and currently the South African government is overspending. Exacerbating this are the local structural issues, along with external issues like a weakening global economy and a dip in the commodity cycle, meaning the Treasury is unable to generate the revenue it budgeted for. So, while Godongwana’s austerity message set the right tone, we need to see if government is willing to act on Godongwana’s proposed reforms.
We do want to stress, however, that while this was a challenging MTBPS that contains many fiscal risks, there are some green shoots on the horizon, like the increase in public and private sector spending on infrastructure development, which should boost South Africa’s growth, and hopefully with it, tax collections.
Despite this uncertain fiscal situation, Citadel maintains its long-term investment strategy. We will ensure that as much risk as possible is mitigated, while taking advantage of the opportunities the market provides.