Glaring omissions from Mboweni’s MTBPS
By Nolan Wapenaar and Casey Delport
CAPE TOWN – In what is seemingly becoming his trademark, Finance Minister Mboweni delivered a short-worded budget speech, highlighting both the need for fiscal consolidation and the high execution risk present.
One can best describe the contents of the speech in three categories: The good, the bad and the mysterious.
Government reiterated its commitment to reduce spending growth, shift spending patterns and stabilise the debt-GDP ratio in the medium term. Positively, the projected fiscal consolidation is not premised on unduly optimistic revenue expectations or excessive tax hikes. Furthermore, economic growth estimates for 2021 (3.3 percent), 2022 (1.7 percent) are more on the low side – thus leaving scope for a positive uptick.
Notably, the majority of the government spending cuts are coming from the wage bill, and the deficit for 2020 remains as set out in June. Government has so far been surprisingly committed to the wage bill savings, supported by the strong public sector wage growth in recent years and the context of severe pressure on private sector employment and income during the current economic crisis amid the Covid-19 pandemic.
However, in what forms some of the most positive aspects of the speech, the Finance Minister categorically ruled out prescribed assets and spending on debt to try stimulate the economy. This follows ANC head of economic transformation, Enoch Godongwana’s recent confirmation that identifying viable developmental investment opportunities would be the focus for government instead of resorting to a policy of prescribed assets.
Unfortunately, SAA will be receiving its further bailout – largely fuelled by cuts in basic service provisions. This sets an uncomfortable precedent with regards to the government’s handling of problem state-owned entities (SOEs). Interestingly, the Land Bank requires a further R7bn bail out – this is quite sizeable when considered against their R2.2bn of bonds in issue and previous bailout of R3bn.
Debt is now expected to stabilise at 95 percent, which is more realistic than previous assumptions. It is a very high number, but it is plausible. This is at the upper end of the range the market was expecting. If there is any fallout, it will be minor.
There were some glaring omissions from his speech – nothing was said on Eskom or on increasing taxes. We note that in June, Mboweni said he had no plans to raise taxes at present and we would presume that this still holds.
Following the speech, local bonds are about 10bpts weaker. However, we highlight that global sentiment towards emerging markets (EMs) is negative today, so it is difficult to say how much of this weakness is due to the budget and how much is due to the global environment. We would venture to guess that it's probably a bit of both.
Nolan Wapenaar is co-chief investment officer and Casey Delport is and investment analyst at at Anchor Capital.