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Rand firms on positive notes in Enoch Godongwana’s first Medium-Term Budget Policy Statement

Published Nov 11, 2021


MARKETS read some positives in Finance Minister Enoch Godongwana's maiden Medium Term Budget Policy Statement (MTBPS) with the rand firming more than 1.5 percent to R15.24 per dollar late yesterday afternoon.

This is as economists pointed out that the sheer quantum of debt however is still projected to climb further, with 2024/25s R5.5 trillion double 2018/19s R2.8trn, while the country's credit risk, which is the perceived risk of default, has slightly moderated.

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Investec economist Annabel Bishop said this is still a decline in fiscal health as borrowings continue to rise, and this will not allow for any credit rating upgrades, nor likely a removal of the negative outlooks that key agencies have SA on.

“Debt service costs continue to climb, but are fractionally lower than the 2021 Budget projection, projected to peak at 5.4 percent  of GDP in 2025/26 (from 5.3 percent), as gross debt does at 78.1 percent (80.5 percent), with bonds strengthening somewhat.

“The budgeted figures present an improvement, but all the projections would be at great risk if there are further crises which depress revenue and increase expenditure,” Bishop said.

Markets welcomed the positive notes in Godongwana's address with enthusiasm saying the MTBPS had hit the right tone and incorporated all the “keywords” which the market was hoping for.

Although the headline fiscal deficit ratio relative to gross domestic product or GDP, came in slightly wider than the market consensus as well as relative to estimates by the South African Reserve Bank, there were no major negative surprises with a number of issues left to provide further detail on in the February 2022 National Budget.

“Markets will be relieved at the policy continuity and a strong intent of becoming more pro-growth via collaboration with the private sector through public-private partnerships etc,“ said Casey Delport, investment analyst at Anchor Capital.

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The major point for economists was that government’s medium-term revenue projections appear slightly conservative, and has correctly budgeted the windfall from elevated commodity prices as temporary, thereby avoiding a repeat of the costly mistake to anchor expenditure on overly optimistic revenue assumptions.

Notably, National Treasury’s expenditure estimates have not incorporated additional social relief beyond current commitments and these type of social relief measures are notoriously difficult to roll back once implemented.

Bernard Sacks, tax consulting partner at Mazars in South Africa, said the good news in the MTBPS was that government has indicated a commitment to accelerate structural reforms with a view to promoting growth, while exercising fiscal discipline to narrow the deficit and stabilise debt.

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“Their projection is that from 2024/25 they will be able to achieve a primary budget surplus - revenue exceeding non-interest spending,” said Sacks.

Even more encouragingly, the minister noted that “government intends to shift expenditure away from consumption and crisis response towards growth-enhancing investment,” said Sacks.

Reza Henrickse, PPS portfolio manager, said Godongwana’s maiden MTBPS was broadly in line with expectations, judging by the muted reaction from the bond and currency markets.

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“Not too dissimilar from his predecessor, Tito Mboweni, the budget address was an attempt to find a balance between continued fiscal consolidation, while paving a way for improved economic growth.”

Hendrickse said South Africa has benefited from the rebound in global growth, but in line with its emerging market peers, growth has not been as impressive as developed markets.

National Treasury expects the domestic economy to grow 5.1% this year, and to average 1.7% over the next three years, dependent on the vaccine rollout and weighed down by unreliable electricity supply.

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