#Budget2019: Laying a foundation for growth

By Martin Hesse Time of article published Feb 25, 2019

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MOST COMMENTATORS agree that, while certain aspects of Wednesday’s Budget presentation by Finance Minister Tito Mboweni may hamper economic growth in the short term, it has the potential to provide the foundation for a more stable, prosperous economy in the long term.

While government debt - and the servicing of this debt - will increase over the next few years, this should start to decrease as measures to stabilise the economy, such as fixing Eskom and other state-owned enterprises (SOEs) and reducing the public-sector wage bill, take effect.

Other growth-enhancing measures include a relaxing of international visitor visa regulations, expanded eligibility for the youth employment tax incentive scheme, nearly R20billion in industrial business incentives, President Cyril Ramaphosa’s promised Infrastructure Fund, and a resuscitation of government subsidies for first-time home-buyers.

Isaah Mhlanga, the executive chief economist at Alexander Forbes, says the Budget was “a structural reform Budget, which aims to reduce the immediate fiscal and economic risks posed by Eskom’s and other SOEs’ unsustainable balance sheets and operational models.

“To be conducive, stable and predictable, the economy requires security of energy and a capable state. In this respect, the R69bn Eskom funding for the next three years to facilitate its restructuring is a required step in the reform of the energy sector. One of the longstanding issues has been the bloated public sector wage bill. National Treasury has budgeted for a R50.3bn decrease in public spending, largely reflecting a decline in the salaries and wages due to natural attrition and early retirement without penalties,” Mhlanga says.

A restructuring of the South African Revenue Service (Sars) will ensure that tax is collected efficiently and that “Caesar receives what is due unto Caesar”.

Carla Rossouw, a tax manager at Allan Gray, says: “We have seen a shift in this Budget from revenue collection to restoring the public’s confidence in the credibility of the revenue collector by prioritising the appointment of a permanent commissioner in the coming weeks, reinstating the Sars Large Business Unit and increasing the efficiency of tax collections by focusing on enforcement and embracing new technology.”

Another factor in ensuring an economic turnaround is our standing with the international ratings agencies. On the basis of the Budget, most economists agree that, although these agencies are extremely unlikely to put South Africa up a notch, they are unlikely to downgrade us further.

Maarten Ackerman, the chief economist at Citadel, says: “A fiscal deficit of 4.5% and a debt-to-gross domestic product (GDP) ratio of 60.2% is really pushing the limits. Both of these numbers are in the red zone as far as the ratings agencies are concerned, and if we make one misstep, we would be very close to a downgrade.

“The GDP numbers are obviously crucial, and I think the 1.5% forecast for this year is realistic, increasing to 1.7% next year and then to 2.1% the following year.

“Keeping Eskom’s debt off the balance sheet is positive, and the rating agencies are likely to give us the benefit of the doubt for now, but time will tell if we can implement the policies that we have put on the table. Should economic growth not materialise, those deficit and debt numbers could be much weaker than budgeted for at the beginning of the period.

“For now, I think Mboweni might have bought us a little more time.”

PwC strategy and economists Lullu Krugel and Christie Viljoen disagree. “South Africa has been downgraded to sub-investment grade by S&P Global Ratings and Fitch Ratings due the deterioration in its fiscal position over the past decade. If rating agency Moody’s were also to downgrade the debt to sub-investment level, South Africa would be removed from the Citi World Government Bond Index. This would prompt asset managers and pension funds to sell billions of rands worth of domestic bonds. This would sharply increase the cost of debt and put pressure on the exchange rate.

“Rating agencies are likely to be unhappy with the widening of the fiscal deficit, higher projected peak in public debt, as well as increased exposure to the financial woes at SOEs. In spite of steps to address the Eskom crisis, as well as the public wage bill, PwC sees a high probability of Moody’s downgrading South Africa to non-investment grade this year,” Krugel and Viljoen say.

On the controversial issue of land expropriation without compensation, Rudi Botha, the chief executive of bond originator BetterBond, says: “The most exciting aspect of the Budget for us was the clear indication that the government is in favour of private property ownership. The Budget specifically allocates R3.7bn over the next three years to assist emerging farmers who wish to purchase land, and introduces the new Help-to-Buy subsidy for first-time homebuyers, which has been allocated R950 million.

“We also welcome the news that R14.7bn of funding has been brought forward for grants to assist in the upgrading of informal settlements, to ensure that residents are provided with basic services. This will go a long way to improve the basic living conditions of millions of people.”


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