JOHANNESBURG – The 2019 tabling of the Budget continues to show a tough fiscal environment. Revenue projections for 2018/19 and 2019/20 to 2021/22 are projected lower than last year’s Medium-Term Budget Policy Statement (MTBPS) and expenditure higher only in 2019/20, while the fiscal deficit widens to 4.5 percent of gross domestic product (GDP) for 2019/20, from 4.2 percent of GDP previously.
Eskom is to receive a R69 billion allocation over three years.
Reducing its growth forecast forGDP for calendar 2019 to 1.5 percent year-on-year (y/y) from 1.7 percent y/y would have helped widen the deficit, while projections on debt levels will rise until 2027, these are higher than projections made in the October’s mini Budget last year. Gross debt now peaks above 60 percent until 2023/24, as compared to a previous expectation of 59.6 percent of GDP. South Africa’s debt servicing costs will rise as a consequence of the rise in debt projections, to R247bn by 2021/22 (4 percent of GDP), the fastest growing item in the budget. The expenditure ceiling consequently increases in 2019/20 and over the Medium Term Expenditure Framework (MTEF) period of 2020/21 to 2022/2023. Direct taxes have not been increased (other than bracket creep, which is expected to raise R12.8bn). This vastly improved efficiency is planned at Sars in the face of falling levels of tax assessments, from 817 597 in 2015 to 483 473 for corporates and from 6 million individuals in 2014 to 4.9 million in 2017, not all of which can be attributed to the weakening in economic growth from 1.8 percent in 2014 to 1.3 percent y/y in 2017.
Consequently, a broadening of the tax base is urgently needed, while policy uncertainty needs to be reduced, corruption and weak to failing governance eradicated and business confidence supported in order to foster fixed investment. Indeed, business confidence has been shown to rise as government finances improve.
The rand has weakened in response, to R14.27 to the dollar, R16.18 to the euro from R14.04/$ and R15.93/€ yesterday, while the yield on the R186 has lifted to 9.14 percent from its close yesterday of 8.86 percent.
Eskom essentially gains R23bn a year, but Finance Minister Tito Mboweni has ascertained that the government will not take on Eskom’s debt.
“Eskom took on the debt. It must ultimately repay it. We are setting aside R23bn a year to financially support Eskom during its reconfiguration,” Mboweni said. The additional monies allocated to Eskom, essentially R23bn a year, will service Eskom’s debt, and allow it to meet redemption requirements, as well as funding urgent operational improvements.
Moody’s said “for the sovereign, financial support to Eskom accompanied by measures that durably stabilises its financial health would be credit neutral.” Monies have been extracted, however, from higher debt levels, as well as bracket creep (not adjusting for inflation increases on taxable earnings of individuals), with expenditure projections for 2019/20 higher. Government expenditure is expected to rise (versus MTBPS projections) in order to provide financial support to Eskom.
This will likely be seen as credit negative by Moody’s, but as it is only one year it may be enough to stave off an actual credit rating downgrade for South Africa this year. Additionally, the budget deficit returns to the MTBPS 4 percent of GDP over the MTEF. However, we continue to expect a downgrade this year to Moody’s outlook on South Africa’s dual long-term debt (local and foreign currency) credit rating from stable to negative, if not a downgrade to the actual credit rating itself.
A negative outlook can indicate a rating downgrade within 18 months. The wage bill shows some containment as about half the reduction in projected expenditure is due cuts in “compensation budgets, reflecting faster-than-expected declines in head counts, as well as the anticipated effects of other interventions, including early retirement without penalties.”
Annabel Bishop is the chief economist at Investec.
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