Treasury has just set a very dangerous precedent

 ·21 Feb 2019

Finance minister Tito Mboweni has delivered his 2019 budget speech, showing that South Africa has run out of room to manoeuvre – forcing the government to make tough decisions.

One of the biggest worries in the budget, that has been treated rather casually, is the fact that Treasury has broken the expenditure ceiling – something that can be seen as a ‘Rubicon moment’ for South Africa.

The expenditure ceiling has been revised up by R14 billion for the coming year and will see further revisions of R1.3 billion and R700 million in subsequent years.

The reason government had to take this action is due to the demands on the fiscus by Eskom, which will be receiving government support totalling R150 billion over the next 10 years – R69 billion which will come over the next three years.

“This move (to break the ceiling) is negative. The whole point in the ceiling is that it is not altered,” said Intellidex analyst, Peter Attard Montalto.

“An important Rubicon has been crossed – the ceiling has gone ‘off formula’.”

This puts South Africa in a dangerous position, as there is now a precedent to just shift the goalposts whenever challenges arise.

However, credibility can be maintained if government sticks to the new ceiling during future challenges, Attard Montalto said.

He added that because the ceiling has been adjusted by less than the total increase in spending due to cuts, this shows that some ceiling ‘mindset’ still exists.

A big worry, though, is that the Eskom bailout which caused the ceiling break is likely only a ‘minimum’, with chances high that it will have to be increased.

Speaking to journalists ahead of the budget speech, Mboweni said that the financing agreement with Eskom had very strict conditions, and was akin to putting the power utility under curatorship.

According to Intellidex, however, the commitment makes it incredibly difficult for government to now ever pull support for Eskom, saying that Treasury needs to make the conditions public so that markets and banks can police it.

Budget reaction

Reaction to Mboweni’s budget has been coming in from all sectors – with analysts welcoming the frank and honest presentation of South Africa’s constrained finances.

Opposition parties have listed their faults with the budgets – while unions have outright rejected it and resorted to protests outside Parliament – but the groups that economists have their eyes on are the ratings agencies.

Currently, S&P Global and Fitch have South Africa in full junk status, with only Moody’s holding the country in investment grade, thus keeping it in the Citi World Government Bond Index (WGBI).

A downgrade to sub-investment grade would see South Africa expelled from the WGBI, prompting asset managers and pension funds to sell domestic bonds. This would sharply increase the cost of debt and put further pressure on the exchange rate.

Moody’s, which is expected to deliver a rating review on South Africa in March, noted that the budget revealed that the country has no more room to manoeuvre and has effectively reached the end of its fiscal flexibility.

“The budget shows a further erosion in fiscal strength after the October medium-term budget policy statement already pointed to wider deficits for longer,” the group said.

According to Intellidex, Moody’s is likely on course to cut South Africa’s outlook to negative in March (with a possible cut to junk in November) – “but this is far from a certainty,” it said.

Moody’s has been exceptionally lenient with South Africa, keeping it in investment grade, despite other ratings agencies having long since downgraded the country to full junk status.

“An outlook cut is far from certain, it is not a slam dunk, given the extreme benefit of the doubt that Moody’s has given in the past. Further announcements on Eskom in the coming weeks could also win them over. It is very much a case of now or never, however,” Attard Montalto said.

Read: The 2019 budget in a nutshell

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