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JOHANNESBURG – Treasury now expects widening deficits resulting from the Eskom income statement support being greater than under-spending elsewhere. The main fiscal deficit is expected to widen to 4.7 percent of gross domestic product (GDP) in the 2019/20 financial, before narrowing to 4.3 percent in the 2021/22 financial year. 

The self-imposed spending ceiling will be breached and the debt to GDP ratio has been lifted slightly to 58.9 percent – from 58.5 percent previously – and is expected to peak at 60.2 percent in 2023/24. The government also experienced a marked deterioration in contingent liabilities.

The budget does not change our expectation that Moody’s will change the government’s sovereign rating to a negative outlook. All key fiscal metrics are worse than Moody’s anticipated late last year and the expenditure ceiling has been breached. 

On the positive side, Eskom support has taken on the form of income statement support with strict conditions surrounding the implementation of a turnaround plan, as opposed to government taking over R100 billion in liabilities on its balance sheet – as was widely speculated prior to the speech. 

Excluding Eskom support, spending cuts have also demonstrated a commitment from the government to get its house in order. 

Widening deficits are normally seen as being more equity than bond friendly but this budget is neither. Spending is being cut back so the economic environment will remain challenged from a risk asset perspective while borrowing requirements have gone up keeping bond supply under pressure.

Some of the more specific impacts on SA equities include:

  • While there were no changes to income tax brackets, there were also no adjustments made for bracket creep. This, together with higher “sin taxes” and fuel levies will have a negative impact on the consumer – offsetting this somewhat will be a longer list of zero rated VAT items (but this was already known prior to the speech). Medical aid tax credits have not been increased. Grant payments were increased by approximately 5%. Pressure could translate into top-line pressure for consumer stocks.
  • Specific to “sin taxes”, excise tax on beer/cider, wine and spirits is to rise by 7.4%, ahead of CPI. This will be negative for the likes of Distell.
  • Sugar tax was adjusted for inflation. This will have a marginally negative impact on food and beverage producers.
  • Moving forward with proposals from the 2012 budget, government intends to publish draft legislation this year on a proposed 1% gambling levy to fund rehabilitation and awareness-raising programmes. This could have a medium-term impact on the likes of Tsogo Sun and Sun International.
  • The introduction of Carbon tax on 1 June 2019 will be negative for large emitters like Sasol, the steel industry, and other manufacturing groups. Sasol has previously estimated the impact on its income statement specifically at between R700 million and R2 billion a year.
  • The higher fuel levy will be negative for logistics companies although many operate on a pass-through basis.
  • Because of the way ad valorem excise duty is calculated, vehicles produced locally are taxed at a higher rate than imported vehicles. To remove this anomaly, government proposed to align the tax treatment. This could provide some support to the local vehicle manufacturing industry along with motor vehicle retailers and they could use this opportunity to restore margins, which have been under immense pressure over the last few years.
  • Lower capital expenditure near term by government will be a net negative for infrastructure players – specifically in the construction space. A commitment to longer term support for the infrastructure fund will be positive.
  • An additional R3.5 billion has been made available to improve non-toll roads. This is expected to be positive for the likes of AECI and Raubex.
  • There was no new information provided on the NHI. Although probably marginally positive (it seems as if government will delay implementation), the overhang for SA hospital groups will likely persist.

Chantal Marx is head of research at FNB Securities. The views expressed here are his own.

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