On Wednesday, South African Finance Minister, Enoch Godongwana delivered his Medium Term Budget Policy Statement (MTBPS). Despite being somewhat underwhelming, it was realistic, and it is clear that the Finance Ministry is trying to do the right thing in a time of great local and global uncertainty.
The Minister did not sugar-coat the economic challenges facing the country and neither did his ministry try and inflate growth numbers. Godongwana forecast that the country’s growth will average 1.6% per annum over the fiscal framework and acknowledged that the road ahead is going to be challenging for the country. The speech suggested, however, that Treasury is being prudent and will do everything in its power to keep expenditure down and to allocate resources carefully.
While Godongwana’s speech lacked specifics and was vague in terms of the numbers, there are some positives that are worth mentioning. The first is that this was not a populist budget and it showed that the government is trying to put measures in place to attract investment and grow the economy. In addition, the allocation of the windfall in tax collection from last year has not been allocated to recurring or wasteful expenditures, rather it has been assigned to reducing the government’s debt bill and to support social spending.
Another positive is Treasury’s commitment to increase government investment spending by nearly 70% over the next few years. This will go towards upgrading existing and building new infrastructure, with the assurance that the private sector and small and medium-sized enterprises will be encouraged to partner in these projects. If this is successful, it will provide a significant boost to investor confidence, and help reignite the economy and reduce unemployment. However, we do believe it is one thing to allocate resources, but another to have “shovel-ready” projects to invest in. One of the biggest challenges government faces is in the tender process and allocating tenders for development.
In our view, the MTBPS was optically good, but there are many challenges, including a weak global economic backdrop, the financial drain from the country’s state-owned enterprises and a lack of action against them, an inability to implement plans and projects, slow economic growth, and decreased revenue collection. We are also concerned that debt, although stabilising is not coming down significantly. In this slow growth environment short- to medium-term tax collection may not reach targets, which may mean the country will be forced to tap into debt markets once again.
An important element of the budget that must be mentioned is the issue of South Africa’s potential greylisting next year, which is a consequence of the collapse of the country’s commercial crime investigation and prosecution institutions, at least as far as achieving positive results are concerned. This poses significant reputational and credit risk for the country. Although it was specifically noted that a number of legislative amendments have been proposed and the budget includes a significant allocation to improving the ability for government to prosecute financial crimes, we do believe the greylisting will probably be inevitable. The budget does, however, indicate that government is doing what it can to get South Africa removed from the list as soon as possible once added.
Markets reacted calmly to the MTBPS, suggesting that the message was as expected. We believe this budget still presents good opportunities and given the background, SA long bonds, with yields north of 11%, offer a solid opportunity in a high inflation environment.
As always, we will keep a close eye on matters and keep you informed of any developments that may impact your investments.
Written by: Citadel Asset Management