When South Africa’s new Finance Minister, Enoch Godongwana, delivers his first Medium-Term Budget Policy Statement (MTBPS) on Thursday, November 11, he will need to focus on business-friendly policies that stimulate sustainable economic growth to ensure that South Africa avoids real fiscal difficulty over the next two to three years, according to wealth management experts at advisory group Citadel.
Citadel Chief Economist, Maarten Ackerman, says all eyes will be on Godongwana to see if he keeps his predecessor Tito Mboweni’s more economically prudent policies that were designed to stimulate business growth, grow the fiscus and create jobs.
MTBPS “should prioritise economic growth”
Ackerman does not foresee Godongwana making any big changes to existing budget policies. “Looking at where we are right now, we don’t really see big announcements regarding tax changes or any other policy changes, so it's likely to be more of an update, and an indication of what we can expect when the National Budget Speech is delivered in February,” says Ackerman.
Citadel Chief Investment Officer, George Herman agrees: “The MTBPS is often more about policy than nitty-gritty numbers, but it does tell the market where the governing party is taking our finances.”
Ackerman points out that the South African economy has rebounded more positively over the past year than had been expected, or budgeted in the February National Budget, partly thanks to the reopening of the global economy supporting strong exports from the local commodities and agricultural sectors.
“This doesn't mean that we are out of the woods yet, it just appears far better in comparison to the worst of the pandemic. What one hopes to see is whether the minister is going to be prudent and use this opportunity to ‘bank’ some of the benefits that we've seen, because we are still in a very tight fiscal position and, if we don't get the economy going very soon, we might have some further fiscal challenges in the next two to three years,” says Ackerman.
The balancing act
Godongwana will need to balance providing sufficient support to policy items that drive sustainable, long-term economic growth, such as those that bolster stable electricity supply, the restructuring of ports, industrial development and remove any red tape that impact the ease of doing business, while still carefully managing policies that are intended to close South Africa’s inequality gap, such as social support, minimum wage, and the proposed National Health Insurance.
Says Ackerman: “But that is where the problem lies: if we don't get the economy going in the next two to three years, it will be very difficult to remove that social support and if we don't get more tax revenue from a faster growing economy we will need to borrow even more. About 20% of South Africa’s tax revenue is already going to servicing debt, which is why the longer-term risk of a very bleak fiscal environment remains if we don’t strengthen the economy urgently and broaden the tax base.”
Herman concurs: “Revenue numbers for 2021 are likely to exceed the February National Budget numbers by something in the region of R120-billion. Unfortunately, the government has already begun spending this, which is exactly where the uncertainty lies. There are several big-ticket social commitments on the cards and the question is: how permanent will some of this social relief spending become?’”
Debt-to-Gross Domestic Product ratio
Herman says South Africa’s debt-to-GDP ratio does not look like it will be stabilising anytime on the medium-term horizon. “Despite being adjusted lower thanks to the new bigger GDP value, the debt-to-GDP ratio is now on the increase again.”
Focusing on bond yields in the capital market, Herman believes these are priced attractively relative to fair value which seems to indicate that the markets have priced in some risk factor and uncertainty around the MTPBS. “So, I don't expect any shocks for the bond market emanating from the medium-term budget.” However, there was always a risk that if something in the medium-term budget had to ignite some form of panic, foreign investors who have been consistent sellers of South African bonds could be spurred to sell off SA bonds again. If this happened, the rand would be most adversely affected by the MTBPS.
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