The upcoming Medium Term Budget (MTBPS) on 24 October is not likely to surprise the markets greatly, either for good or ill, says Absa senior economist Peter Worthington.
“The newly appointed finance minister, Tito Mboweni, has not had sufficient time to stamp his mark on fiscal policy and, anyway, the National Treasury has very little room to manoeuvre against a backdrop of weak growth and political constraints on necessary fiscal and structural reforms.
Absa said that although the markets seem to have high expectations of the new finance minister in two senses, there is little that Mboweni can actually do. Firstly, most of the fiscal programming was completed by the National Treasury staff well before Mboweni was appointed to replace Nhlanhla Nene a little over a week ago on 9 October.
“Secondly, and more importantly, Mboweni has very little fiscal space in which to maneuver, with a budget deficit that remains much too wide to cap the upward growth of public indebtedness. Solving South Africa’s fiscal imbalances requires some bold and politically challenging decisions regarding SOCs and public sector compensation that are simply unpalatable for the government, especially so close to general elections.
“Thus, in general, we expect this MTBPS to simply hold the fiscal fort, with no big negative shocks nor a few upside surprises either, leaving the fiscal trajectories of the 2018 Budget largely intact. It is unclear how the market will react to this,” it said.
Worthington said that given that both inflation and real GDP growth are likely to undershoot the 2018 Budget assumptions, tax collections could also disappoint, unless tax buoyancy proves more robust than the Treasury initially expected.
“However, so far in FY 2018/19, tax collections are running ahead of target, so even if the pace of collections falters somewhat in the second half of the year, any slippage is likely to be relatively minor.
“We expect slippage of 0.2% of GDP on the main budget balance. The MTBPS will likely report that overall expenditure growth remains contained, with the current run rate of 6.8% y/y below the Budget forecast of 7.7% y/y,” the economist said.
Worryingly, however, there is pressure for more spending; for example, to bail out state-owned companies, Worthington said.
“Markets will be alert to any sign of the hitherto sacrosanct expenditure ceilings being revised upwards. Of particular interest with regard to the expenditure targets will be the updated projections for public sector employee compensation, particularly since the three year wage agreement was slightly in excess of the 2018 Budget targets.”
Absa noted that the government has promised no mass retrenchments, “so it will be interesting to see if the MTBPS reveals a strategy for curbing public sector pay through other means”.
It said that investors will also be watching the 2018 MTBPS for more details on the R50 billion reallocation of existing expenditure as part of president Ramaphosa’s stimulus plan that was unveiled in September.
“It is unclear if the MTBPS will detail a set of plans for dealing with the plethora of bailout requests from state-owned companies, such as South African Airways (SAA).
“We think if the government wants to send a bold and confidence-boosting signal to the market, it could conceivably surprise with an announcement to put SAA into business rescue, but this is not our base case scenario,”Worthington said.
The MTBPS might also provide the government’s decision with regard to the recommendations of the Woolard panel that the list of items zero-rated for VAT be expanded at a cost of R4 billion as a means of poverty alleviation, he said.
However, any implementation is unlikely to come until the 2019 Budget.