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Emerging Perspectives

South Africa: Mboweni delivers sober budget

22 February 2019
Author: Nazmeera MoolaHead of SA Investments

Mboweni delivers sober budget, weighed down by Eskom

South Africa’s finance minister, Tito Mboweni, delivered some tough messages in his first budget speech. 

Eskom weighs on deficit

In line with market expectations, the South African government has made a significant allowance for the struggling utility giant Eskom in its budget. However, contrary to expectations of a government take-over of a significant portion of Eskom’s debt, the National Treasury has instead provided its support through the normal expenditure channel. This adds approximately 0.4% to the main and consolidated budget deficits in each of the next three years. To put this in context, without the Eskom charge the main budget deficit would have narrowed to 4.2% of GDP in financial year 2019/2020 instead of the published 4.7%. 

The National Treasury is unwilling to take on Eskom’s debt as it believes it would incentivise the wrong behaviour. Any transfers to Eskom (or any other state-owned entity) would be dependent on significant cost saving programmes. By stipulating that the support aims to ensure that Eskom can pay its debt and it cannot be used to make operational payments, the National Treasury has made it clear that it is confronting head-on the challenge posed by Eskom.

Will it be enough to appease the rating agencies?

The National Treasury indicated that it had engaged with rating agencies on Eskom ahead of the Budget. However, we believe a concrete plan on Eskom’s turnaround would be needed in the next few weeks to prevent Moody’s from moving South Africa’s outlook to negative at its March update. Moody’s has previously said that it would only view as neutral a government take-on of Eskom’s liabilities (either directly or indirectly by providing support) if it were accompanied by an immediate cost-reduction plan that could be implemented imminently. This has yet to be produced. 


The National Treasury believes there is room to cut the wage bill by R27bn over the next three years. These savings are needed to fund a number of measures aside from Eskom, including a rise in the Youth Wage Subsidy, provision for a gradual roll-out of National Health Insurance and a R3.5bn increase in the South African National Roads Agency (SANRAL) budget.  While it remains to be seen whether the government can deliver on this promise, the undertaking by members of parliament and provincial legislatures and executives at public entities not to receive a salary increase in this financial year is a good starting point.   

Budget exposes fiscal decline over the last decade

This latest budget is a reflection of ten years of weak economic stewardship, in our view. The best encapsulation of this is the deterioration of state-owned companies. In 2011/12, state-owned companies averaged a return on equity of 7.5% – not high by private sector standards, but more than adequate for a state entity.  By 2017/18, this had deteriorated to -0,3%. The government has been losing money across its portfolio of companies. However, the willingness of President Cyril Ramaphosa and Finance Minister Tito Mboweni to get tough in the run up to a national election does provide reason for optimism on South Africa’s future. 

In conclusion, while the National Treasury has done a heroic job of trying to rein in expenditure by cutting the wage bill and making it clear that any transfers to Eskom (or any other state-owned entity) would first require significant cost savings, more detail is needed to provide assurances that these savings will be achieved.  We will continue to monitor developments closely in the coming weeks and months. 


Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

Nazmeera Moola
Nazmeera Moola Head of SA Investments

Additional Information:
This material is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual results may differ materially from those stated herein. All rights reserved. Issued by Investec Asset Management, issued February 2019.

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