JOHANNESBURG - Yesterday's Medium-Term Budget Policy Statement (MTBPS) painted a bleak picture about the country’s economic outlook and was described as a missed opportunity to inspire investor confidence and defining details for growth.
In his maiden speech, Finance Minister Malusi Gigaba projected that tax revenue would fall short by an estimated R50.8billion in the current year, the largest downward revision since the 2009 recession as economic growth fell below expectations.
Gigaba also warned that the budget deficit would widen to 4.3percent of gross domestic product (GDP) by 2017/18 and a possible expenditure ceiling breach and a 61percent hike in the government’s debt level by 2022.
Maarten Ackerman, the chief economist and advisory partner of Citadel, said that Gigaba yesterday delivered one of the most important mini-budgets in history.
Ackerman said, however, that unfortunately, in spite of appropriate objectives and intentions, Gigaba’s hands were tied by the prevailing situation.
“The numbers paint a bleak picture of our current circumstance. As the country is going through a confidence crisis on the back of policy and political uncertainty, the economy is grinding to a halt.
"On the back of lower economic growth, we will be facing a fiscal cliff if we cannot turn the growth trajectory around. Numbers presented in the budget today realistically reflected these developments,”said Ackerman.
He also said despite Gigaba mentioning the government's full commitment to return confidence, get growth - specifically inclusive growth - going, sort out the state-owned entities and create more jobs, the deterioration of the fiscal framework would act as a headwind to achieve these objectives.
“Unfortunately, rating agencies will view the deteriorating framework as unfavourable, despite all the positive intent from government to turn the fiscal situation around. Any further increase in the unstable political situation from now until December will most certainly result in a local currency downgrade,” said Ackerman.
Professor Raymond Parsons, from the North West University School of Business and Governance, said the speech recognised the extent to which the domestic economy had lost ground since 2012 and acknowledges the highly negative impact of a “low growth trap” on the economy.
The MTBPS had to be based on almost halving the growth forecast for 2017 from 1.3percent to 0.7percent, which has serious fiscal implications, Parsons said.
“But despite the willingness of Finance Minister Gigaba to highlight some of the serious financial and governance challenges facing the public sector in general and certain state-owned enterprises in particular, as well as the need to rebuild confidence, the message of the MTBPS remains very much a holding operation until the main Budget in February 2018.
Despite assurances, there is still a high level of uncertainty around the fiscal projections and several policy outcomes,” Parsons added.
Nazmeera Moola, the co-head of fixed income, Investec Asset Management, said in order to stabilise the budget, the public sector wages needed to be controlled.
“The two problems relating to public sector wages are the persistently high above-inflation wage increases and the dramatic growth in senior management positions, particularly among teachers, nurses and police,” said Moola.
Moola also said governance at state-owned enterprises needed to improve quickly to help stabilise the finances at these entities.
“After years of mismanagement, several state-owned companies are facing liquidity or solvency issues. The most notable is Eskom, which has utilised R250bn in government guarantees and has another R100bn unutilised. Until the governance of state-owned companies is resolved, the problems of corruption, instability of management and opaque targets will continue,” she said.
Moola added there was a need to boost South Africa’s growth rate.
“The divergence between the performance of the global economy and the local economy over the last two years is entirely due to South Africa’s dysfunctional political environment.
The speech states that “demonstrative actions that build business and consumer confidence can encourage global and domestic investment, broaden private-sector activity and boost competitiveness”.
“This is exactly what is needed to encourage businesses to invest and consumers to spend. In contrast, there have been many recent actions by cabinet ministers that exacerbate the lack of confidence, including a mining charter that stunts future investment, the touting of an unaffordable nuclear plan and little demonstrable commitment to resolving governance at Eskom,” Moola said.
Tumisho Grater, an economic strategist at Novare, said he had expected that this would be a difficult budget. However, the true state of the fiscal position was dire.
“The weakness in revenue collection and further downward revisions to economic growth projections have significantly eroded the government's fiscal position,” said Grater.
Wessel Lemmer, a senior agricultural economist at Absa, concurred, saying credit ratings agencies would not view the budget in a positive light.
“The consolidated budget deficit widened from 3.1percent of GDP to 4.3percent of GDP.
"This is likely to increase the risk for a credit downgrade, which will have a negative impact on the agricultural sector,” said Lemmer.
He added that the expected increase in government debt to 61percent raised South Africa's risk for a credit downgrade, impacting negatively on the cost of production inputs such as fertiliser, fuel and agricultural technology as a result of a depreciating rand.
“As a net exporter of agricultural products, the South African agriculture sector is hedged against increased policy uncertainty. However, a weaker rand may paradoxically improve the rate of maize exports and earnings from agricultural exports,” said Lemmer.