The massive risk tied to Mboweni’s emergency budget

 ·25 Jun 2020

Finance minister Tito Mboweni’s supplementary budget tabled on Wednesday has been met with a mixed response from analysts, who say more should have been said, while also conceding that there was little room to manoeuvre, given the country’s dismal finances.

However, one thread was constant throughout the minister’s woven narrative of narrow passages and hippopotami: risk.

According to Intellidex analyst Peter Attard Montalto, Mboweni’s budget held little in the way of surprises, with a sober assessment of South Africa’s current financial turmoil, mixed in with vagueries on planned cuts to government expenditure, and new sources of tax revenue.

However, what the budget delivered in talk of hope and promises of taking the declining economy seriously, it lacked in actual detail – and most importantly, credibility.

“Cutting through the presentational tangle, we can see that this is a budget more about what ‘must’ happen than what ‘will’ happen,” Attard Montalto said. “Commitments from cabinet for consolidation, sure, but that holds little currency without the difficult decisions to make consolidation happen.”

In his budget speech, Mboweni presented two scenarios for South Africa – one based on the premise of “active” response to the coronavirus-led economic fallout, where debt as a percentage of GDP is stabilised at 73.5% by the end of the decade; and the other a “passive” approach of no real intervention, where debt balloons to over 140% of GDP in the same period.

Attard Montalto said, however, that neither one of these scenarios has any credibility. This is because there have been no clear commitments from government to support them, he said, while markets are making the mistake of taking the “active” scenario as the “baseline” scenario – which carries massive execution risk.

“Cabinet has indeed backed reaching a primary surplus in 2023/24, but has not supported any of the measures to reach this point, hence such a commitment has no credibility. The track record of the budget in the past decade simply doesn’t allow benefit of the doubt on such commitments,” he said.

If Mboweni’s best-case scenario relies on 100% execution, this means that the budget is littered with downside risks, and will more than likely fall somewhere in the middle, the analyst said.

This can be seen all over:

  • The budget assumes R250 billion in cuts – with no commitments to them;
  • The public wage cut bill is factored in, but court cases loom that could reverse them;
  • There are contingent liability risks tied to SOEs that still persist;
  • SOE support has been pushed back to the MTBPS, leaving key questions around SAA and Eskom hanging;
  • Expected GDP decline is still off from several forecasts ;
  • Funding buffers are being used up, leading to potential risks around any future fiscal shocks;
  • Government’s R100 billion loan support has been under-utilised, but its full use is factored into projections;
  • There is no detail around phase 3 of government’s Covid-19 response;
  • Many aspects of fiscal policy are highly politicised and uncertain, including things like prescribed assets, infrastructure investment and social programmes.

“Can government agree to some cuts? Yes. Can they agree to R250 billion over two years with top-skilling and ring-fencing occurring? No, we don’t think so,” Attard Montalto said.

“Given no details are provided, it’s challenging to assess, but we remain of the view that running a primary surplus will be anathema to the ANC over time when growth is so weak and there are permanent losses of employment that come to the fore of the political economy discussions,” he said.

The budget did provide some anchor points or indication of policy direction – particularly in the form of the move to zero-based budgeting, and talk of Mboweni’s economic plan published last year – these too are tied up in uncertainty.

Zero-based budgeting was not used for the emergency budget and was more forward-looking. However, when government has three-year agreements in place for things like government wage bills, this is a tricky approach to take. Mboweni’s policy paper, meanwhile, has been left in the hands of deputy finance minister, David Masondo.

This pushes back any meaningful clarity or policy action to October, for the medium-term budget policy statement (MTBPS) to handle.

“The reality is there was little else Treasury could say. The budget was left naked by the inability of cabinet to agree a ‘phase 3’ recovery plan. All eyes for this are now on the MTBPS – which in reality is too late,” Attard Montalto said.

“Without a credible growth plan and growth path to rescue the revenue side, there is no long term stabilisation of the budget.”

Read: Key takeaways from Mboweni’s emergency budget

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