February 20, 2019
SA’s minister of finance, Tito Mboweni, presented a measured budget in Parliament today, taking into account the country’s economic realities.
What emerged starkly from the budget is that SA’s lack of economic growth is hurting tax revenue. In 2018/19 tax revenue was R42.8 billion less than budgeted, across most revenue categories. Without higher economic growth, SA will struggle to generate the revenue it needs to make structural changes.
Local markets were nervous ahead of the budget. The rand weakened and bond yields rose. Investors were anxious about how much funding government would provide to Eskom and how it would affect the deficit. But as it became clear government intends to involve the private sector in key SOEs, the rand strengthened and the key R186 bond returned to pre-budget levels.
The budget made it clear that government will approach SOEs differently in future. It is no longer willing to put in billions without a commitment that SOEs can provide for their own financial well-being.
The minister’s prediction that the budget deficit will rise to 4.5% of GDP in 2019/20 will result in additional government debt. The total debt: GDP ratio is likely to hit 60% in the next couple of years from 50% at present, unless there is higher economic growth to generate revenue. The minister believes the economy will grow, but only to above 2% in three years’ time. At 2% growth, SA will only create 150 000-200 000 jobs, which is less than it needs. The costs of servicing debt will continue to erode government’s ability to embark on more ambitious projects to stimulate growth. It has committed to spending more on infrastructure, but only in the longer term.
To finance the deficit, government is likely to increase the amount it raises via the weekly auctions from about R2.7 billion to about R4 billion or more a week. It will also refinance shorter-term debt to longer-dated bonds. The additional supply is likely to keep SA’s bond yields higher for longer.
We expect the budget will buy SA some time with the ratings agencies, in particular Moody’s Investors Service which is the only rating agency to maintain SA on an investment grade, with a stable outlook. It is likely that Moody’s will downgrade the outlook to negative in March and will make another assessment later of how the government is fulfilling its promises. If there is no growth, an increase in the deficit and a worsening of the debt burden, we believe SA is likely to face a ratings downgrade in the medium term.
To listen to a full analysis from chief economist Kevin Lings and co-head of Fixed Interest, Victor Mphaphuli, click on the podcasts below: