Finance minister Malusi Gigaba is getting ready to deliver the Medium Term Budget Policy Statement (MTBPS) on 25 October, which will finally give investors, businesses and South Africans at large insight into the minister’s economic leanings.
According to research analyst at Nomura, Peter Attard Montalto, this MTBPS will be one of the most important in South Africa, as it will be the first after a rocky year of shifts and reshuffles, and will show how Gigaba dances around the uncertainties created by the country’s turbulent political backdrop, and reveal his fiscal world view.
“This is the fundamental issue at stake for minister Gigaba and his ministerial team at the MTBPS – what is their fiscal world view? The answer is far from clear since his time in office from end-March, but his presentation of the MTBPS on 25 October will be his first real fiscal policy outing,” the analyst said.
The wider political discussion and media reports about the ‘capture’ of National Treasury is effectively unhelpful in answering this question, Attard Montalto said, as investors and ratings agencies will be looking out for less speculative data – specifically on three main areas:
- Gigaba’s fiscal world view
- His political power
- Treasury’s internal fiscal workings
Fiscal world view
In terms of the finance minister’s fiscal world view, the expectation is that understands the need to keep the budget in check in the long run and not cause a crisis requiring the International Monetary Fund to step in – especially if he carried presidential ambitions.
However, within this general outlook, Gigaba’s biases are less certain, Attard Montalto said.
“As there is likely to be a lack of easy revenue hikes or expenditure cuts, there will clearly be a need for some challenging decisions politically and logistically.
“While we would not label the Minister as a fiscal conservative, we think he can push to open up politically useful space for more expenditure in some areas through offsetting expenditure cuts elsewhere, as well as more pressure on revenue especially with higher earners,” he said.
While Gigaba is seen as having more political power than his predecessors (whose relatinships with president Jacob Zuma broke down completely) – the political environment in which he has to operate is not ideal.
“This can, however, skew policy towards measures such as wealth tax, and requirements to make space for broader access to free higher education,” Attard Montalto said.
However, the transfer of broad strategy over expenditure has been handed over to the presidency for the first time and with it the removal of some control and negotiating power from the National Treasury.
It has been held in the past that treasury staff were highly effective at working with line departments to execute strategies – and while this is still seen as the case, Attard Montalto said, the finance ministry has become more remote from its staff in more recent times.
“This point should not be overplayed, but it may cause additional uncertainty into the MTBPS process and the ability for staff to have delegated power to undertake difficult discussions with other departments,” he said.
According to Nomura, market reactions to the statement are likely to follow the same trends as previous years – benign because of effective PR spin on the day, but a surge in scepticism and negative outlooks once it has been dissected and ratings agencies have commented on it.
Ratings agencies will likely take a gloomy stance on the country, but may hold off until 2018 – after the ANC’s elective conference before pushing any further downgrades (though they may still downgrade South Africa during their reviews in November).
For Nomura, the key question beyond the country’s fiscal position will be on the bailouts of SOEs. SAA has already made it clear that it has debt of R13 billion, while the SABC says it needs R3 billion (which Nomura believes is excessive). Eskom will also likely require another equity injection in the coming years, and there are increasing concerns over other state companies like PetroSA.
“The big uncertainty will be over how much is pencilled in and how quickly there will be SOE support for SAA, Eskom and others, and the asset sales that will have to accompany this. We do not envisage a blow out in the budget, but credibility will likely be tested if ‘anonymous’ revenue hikes are leaned on too much and growth and buoyancy forecasts are over-egged,” Nomura said.
“We expect the deficit to move out by around 0.9pp of GDP for the current fiscal year, but the MTBPS may well see a slightly smaller number presented. There is unlikely to be any definitive blow on the ratings side, but is likely to push agencies further down the path towards cuts into 2018.”