While the reaction to Wednesday's Budget presentation in Parliament by Finance Minister Tito Mboweni has generally been cautiously favourable, giving the government the benefit of the doubt in its stated intentions to fix broken institutions and bolster the economy, some commentators are more sceptical, warning of calamity if the government didn't control its debt or tried to extract more from taxpayers.
The interest rate team at Futuregrowth, a boutique asset manager under the Old Mutual umbrella that specialises in socially responsible investing, says that, in the context of the massive funding requirements of state-owned enterprises and a still fragile economic environment, it was underwhelmed by last year's medium term budget expectations and, in many respects, still read this week's Budget as further ‘kicking of the can down the road’.
Futuregrowth says the extraordinary fiscal support to Eskom (R23bn a year over three years) "negates the benefit of departmental expenditure constraint in the 2018/19 fiscal year, and ultimately results in the lifting of the previously sacrosanct expenditure ceiling by R16bn over government's medium-term expenditure framework (MTEF). The net effect is a wider budget deficit over the MTEF (now budgeted to peak at -4.5%/GDP in 2019/20) and a gross debt-to-GDP profile now expected to peak in excess of 60% in 2023/24.
"Our reading of yesterday’s budget would be kinder if we were convinced that the extraordinary support to Eskom would be enough to negate the fiscal and economic risk the entity poses over the medium term. This seems to be where we differ with the market in our reading of the budget. While over-delivering in its support of Eskom, relative to prior market expectations, we’re of the view that this support still falls short of what is required to keep Eskom solvent over the medium term.
"The bottom line is that without improved domestic growth, South Africa’s debt burdening looks increasingly unsustainable – particularly in light of the abandonment of two critical fiscal consolidation anchors (the expenditure ceiling and deficit-neutral SOE funding). Rating downgrade risk remains elevated," Futuregrowth says.