Key takeaways from Mboweni’s emergency budget

Tito Mboweni’s Supplementary Budget Review painted a bleak picture as expected, given that conditions in South Africa have deteriorated from the already weak position prior to the crisis, notes Reza Hendrickse, portfolio manager at PPS Investments.

Even with the counter cyclical fiscal and monetary measures implemented, including the R500 billion Covid-19 support package, rate cuts and easing of financial conditions, the country’s position remains tenuous, Hendrickse said.

The budget spoke to a dim economic outlook, as National Treasury expects the local economy to shrink by 7.2% in 2020, its largest contraction in almost a century. Even this is arguably optimistic, however, in light of the International Monetary Fund’s (IMF) updated forecast of -8.0% this year, with a relatively muted 3.5% rebound next year.

This is against the backdrop of global growth being expected to contract 5.2% in 2020.

“The budget outlined spending reprioritisation, however the glaring issue being faced currently is that revenue collection has collapsed. Tax collections are likely to miss this years’ target by R300 billion, leading to the consolidated budget deficit reaching 15.7% of GDP for the 2020/21 year,” Hendrickse said.

This is more than double the forecast from February.

As a result, the debt trajectory has steepened, and National Treasury now expects government borrowing to be close to 81.8% of GDP this year, eclipsing the previous 65.6% forecast.

Borrowing will be supplemented by $7 billion, which the government intends to borrow from multilateral finance institutions, including $1 billion from the New Development Bank and $4.2 billion from the IMF.

The macro research team at Momentum Investments summarised the following key takeaways from Wednesday’s emergency budget:

Government debt expected to stabilise in FY23/24, but adjustments are necessary

• Initial deterioration in SA’s government debt ratio is due to a R299 billion revenue shortfall (main budget) and an additional R43.2 billion allocation to expenditure in FY20/21;
• Gross debt ratio expected to rise to 86% in FY22/23 (previously 71.6%) – on average the debt ratio is expected to be 14.5% higher over the MTEF;
• Primary balance remains in deficit during the MTEF – it is expected to narrow to 2.3% by FY22/23 (previously 1.1%) from 9.7% in FY20/21 (previously 2.6%);
• Debt-service costs absorb 21 cents of every rand government collects relative to 9 cents in FY08/09 – interest bill expected to rise from 4.9% of GDP in FY20/21 to 5.4% of GDP in FY22/23;
•  Measures to narrow the budget deficit and stabilise debt will be announced in the October 2020 medium-term budget policy statement (MTBPS).

Cost reductions, above efforts to reduce the wage bill, are required

• Treasury has attempted to reopen the final year of the current wage agreement to achieve R37 billion in savings – the proposed savings of R55 billion in FY21/22 and R67 billion in FY22/23 are arguably more crucial;
• Treasury claimed that failure to achieve R230 billion worth in savings (beyond the projected cuts to the civil servant wage bill) would result in even larger cuts to the wage bill or a reduction in spend in other areas of the budget;
•  Little detail was given on the current negotiations between government and the unions – raising concerns over whether government will successfully achieve a reduction in the wage bill of this size;
• Conditional grant transfers were scaled back and delayed where possible;
• Limited details were shared on the zero-based budgeting approach treasury is expected to adopt – ultimately this process could be time consuming and costly, but it should enhance transparency, enforce accountability and allow for a phasing out of programmes that have little effect on service delivery or economic performance.

Income and other support to consumers

• Government awarded temporary social grant top-ups (67.4% increase in child support grants and 13.4% increases in old age and disability grants) for six months;
• These social assistance interventions will apply until October 2020 – continued household vulnerability may pose a challenge to removing the top-up grants;
• At mid-June 2020, the Unemployment Insurance Fund has disbursed R23 billion to more than 4.7 million employees;
• Banks have provided R30 billion of relief to customers;
• Awareness of damaging effect of further tax hikes to economic growth has warded off significant tax proposals – tax increases proposed are modest in our view;
• However, projected wage cuts of R160.2 billion in the MTEF imply lower spending ability particularly for middle-income earners.

State-owned enterprises (SoEs) and municipal finances remain in disarray

• The February 2020 national budget already included a R16 billion allocation to SA Airways – the additional R10 billion may only come through in the October budget, once the business rescue plan has been finalised;
• Treasury to inject R3 billion in equity in the Land Bank while restructuring plans are being finalised – the institution plays a critical role in providing 29% of SA’s agricultural debt;
• Despite lockdown restrictions lowering revenues for Airports Company South Africa, Eskom and the South African National Roads Agency Limited, no other intra-year spending adjustments were proposed for SoEs;
• Treasury noted SoE reform included rationalisation and equity partnerships;
• No adjustment was made to the R1.1 million taxi industry relief fund despite backlash;
• Metropolitan municipalities reported that revenue collected in April fell by 30% on average as a result of higher non-payment by customers – this places local governments deeper in financial stress.

Infrastructure at the centre of the recovery plan

• SA’s investment-to-GDP ratio tanked to 17.9% in 2019, which is the lowest since 2005;
• Treasury reiterated that infrastructure would feature strongly in SA’s economic recovery;
• Government showcased 280 projects (88 already considered to be bankable) at the Sustainable Infrastructure Development Symposium held on 23 June 2020 which was attended by 681 delegates;
• At the symposium, it was announced that government is considering the introduction of green infrastructure bonds;
• The New Development Bank has registered a bond sale plan with the Johannesburg Stock Exchange and the first phase is expected to be completed within six to nine months Financing the Covid-19 stimulus package and the gross borrowing requirement
• The significant ramp up in projected debt and issuance will likely add to pressure for further sovereign rating downgrades.

Overall, the Medium-Term Budget Policy Statement will seek to follow a zero-based budgeting principle, that aims to reduce all expenditure thought to no longer be affordable, Hendrickse said.

This Supplementary Budget made it clear that public finances are currently overstretched and that over the coming months, government will need to detail far-reaching reforms, the portfolio lead said.

“Reprioritising expenditure is however not sufficient to tackle the current situation, and greater action is needed in order to curtail spending.  Unfortunately, we continue to face the conundrum of needing to stimulate growth in the face of austerity. And unfortunately, we can expect to see some tax increases in the forthcoming medium-term expenditure framework.”

Read: New tax increases necessary to deal with South Africa’s debt: Mboweni