By Nazmeera Moola, co-Head of Fixed Income, Investec Asset Management
Listen to Nazmeera Moola, co-Head of Fixed Income at Investec Asset Management, preview next week’s Mid-term Budget Policy Statement. You can also read her views below.
Finance Minister Malusi Gigaba is in a tight spot. On all metrics it is clear that the Medium Term Budget Policy Statement (MTBPS), which he presents to Parliament next Wednesday, is going to disappoint.
The large revenue shortfall is well known, running at between R35 and R55 billion in the current fiscal year. At this point in the current year, expenditure cuts are unlikely and the only way to plug this gap is by borrowing more in the market. Even looking further ahead, it is not clear that the Finance Minister has a plan. There is little sign that he has the stomach to significantly cut expenditure in the coming years and without meaningful fiscal consolidation, the debt-to-GDP ratio will not stabilise.
He walks a tricky tightrope. On the one hand he is trying to keep state finances in a reasonable shape but on the other hand he is unwilling to put anybody’s nose out of joint. Unfortunately, the fiscal deterioration has been so massive that unpopular decisions have to be made.
On the current trajectory and without a clear indication of stabilisation in the debt-to-GDP ratio, South Africa’s rand-denominated bonds would lose their investment grade rating within the next twelve months. We estimate that the increase in borrowing costs due to the cabinet reshuffle will add at least R2.5bn to expenditure in the current fiscal year. Interest payments will account for 11% of expenditure in the current financial year. This already hefty interest bill will rise further if we lose our investment grade rating.
Growth plan. What growth plan?
Revenue growth is ultimately dependent on GDP growth. Therefore the credit rating agencies want to see commitment from the government to improving the growth rate. In 2013 and 2014 South Africa could claim that our poor growth was due to weak conditions globally and falling commodity prices. Now, sadly, while the rest of the world enjoys a synchronised recovery, our failure to grow is entirely driven by local politics.
Unfortunately, in the run-up to the ANC electoral conference in December, there is complete policy paralysis with very little focus on the need to get growth going. Minister Gigaba’s 14-point growth plan that was announced in July 2017 was not particularly ambitious. Even so, it appears that several deadlines have already slipped.
State-owned entities continue to flounder
Aside from a sluggish growth outlook, the other major point of weakness in the SA credit rating is the poor governance at state-owned enterprises. Unfortunately, there has also been no progress made in terms of improving the situation. This places additional pressure on the fiscus. Both Eskom and Transnet appear to be running short on liquidity, but it is hardly surprising that these companies are unable to access financial markets locally. It would be difficult to justify investing further pension savings in the debt of institutions with questionable governance. The only way to resolve this is to overhaul governance and so restore investor confidence in these institutions. Until that occurs, funding will not materialise.
National Treasury under threat
Further casting a shadow over the MTBPS are the wide-spread reports that decision-making is bypassing National Treasury. National Treasury has been one of the major successes of the ANC Government post-1994. They inherited a budget and an institution that were both in disarray in 1994. With an enormous investment of time, effort and really good people, the National Treasury evolved into a major source of strength for the South African economy. Unfortunately, there have been clear efforts to undermine this institution in the last six months. This needs to stop, or the long-term damage will take years to reverse.
Is there light at the end of the tunnel?
While there is very little political focus and will to get growth going at this point, we do believe there is some low-hanging fruit that could prove to be a major fillip for growth. While we have all been aware that corporate South Africa hasn’t been investing, households have also not been spending. In fact, household cash holdings as a percentage of GDP are about 3 percentage points higher than their long-term average.
This reflects the weak state of confidence across both corporates and households. There is so much repressed demand from both corporates and households that a market- and economic-friendly ANC electoral conference outcome would likely lead to a solid confidence boost in the New Year. As a result, consumer expenditure would rise as would corporate investment, employment would grow, VAT receipts would increase and growth would get a major boost. We could see GDP growth of 2.5% in 2018 if confidence returns, which would be massively positive for government revenues.
However, everything hinges on the outcome of the conference. Current growth forecasts for next year range between 1.1-1.2%, but that is a weighted average of two possible scenarios. The outcome will be binary - growth will either be zero or 2.5%. Let’s hope it’s the latter.
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