Malusi Gigaba’s maiden budget fails to win over market
Finance Minister Malusi Gigaba’s maiden medium-term budget policy statement in Parliament on Wednesday received a pummelling from the market as the deficit ballooned, revenue collection tanked, spending breached its limits and debt soared to unprecedented levels.
By 5pm, the rand had gone through R14 to the dollar after trading at R13.73/$ before the minister began speaking and the yield on the benchmark R186 jumped to 9.18% from 8.86% earlier in the day.
Banking shares wilted, declining 1.11% with Barclays Africa hardest hit, shedding 1.85% to close at R140.30 per share in Johannesburg.
Economists said the budget had increased the chances that SA’s credit ratings would be taken down to junk status when the ratings agencies provide an update in November.
The statement projects that the deficit before borrowing for 2017-18 will rise to 4.3% from the 3.1% target set in the February budget; spending will be R3.9bn higher than expected; and revenue will fall short by R50.8bn, higher than most in the market had expected.
Growth estimates for 2017 have been revised down from 1.3% to 0.7%. Most alarming, though, was the dramatic increase in the debt burden, which will soar to 60.8% of GDP by 2022, according to the Treasury, way beyond the stabilisation level of 52.9% in 2018 promised in February.
Government’s policy objective since 1994 had been to reduce debt from the 49.5% level it inherited after apartheid.
That project has now been undone, with the debt burden now at an unprecedented level and interest costs heading up to 15% of revenue over the next three years.
In a medium-term budget policy statement that was bleaker but more candid than many had expected, Gigaba kicked the can down the road, delaying all major decisions on the budget until February.
He told Parliament he was giving an honest view.
"It is not in the public interest, nor is it in the interest of government, to sugar-coat the state of our economy and the challenges we are facing.
"Our resolve is to remain on course and not to deviate irretrievably from the fiscal consolidation agenda we embarked on a few years ago," he said.
Overall the public finances showed a steep deterioration, with pay for public servants — particularly in health and education — and debt costs crowding out other spending.
The breach in the expenditure ceiling was due to the bail-out of stressed state-owned enterprises (SOEs), in particular the total of R13.7bn transferred to South African Airways and the South African Post Office.
However, the government remains intent on disposing of state assets to bring spending back within the ceiling by March 2018.
That could include a portion of the government’s Telkom shares, which could be sold ". .. with an option to buy them back at a later stage", the budget statement said.
The statement said that a new course had to be charted, or the "country could remain caught in a cycle of weak growth, mounting government debt, shrinking budgets and rising unemployment".
However, most decisions were deferred to the newly established President’s Committee, a small group of Cabinet ministers, which will make recommendations to the president on expenditure reprioritisation and asset sales.
Gigaba said that the purpose of the new committee was to take hard decisions, including on revision of spending and the tax framework ahead of the February budget.
BNP Paribas economist Jeff Schultz said the government’s plans for fiscal consolidation seemed to have been largely abandoned. "Debt-service costs are set to climb rapidly alongside embattled SOEs, which look to remain a drag on the fiscus.
"Plugging rising debt-to-GDP ratios, which are now on average four percentage points higher over the medium-term, is highly unlikely without higher growth."
"There is no fiscal consolidation," said Patrice Rassou, head of equities at Sanlam Investments, who now expects downgrades of SA’s local and foreign currency ratings by S&P Global Ratings and Moody’s in November. He also expects tax hikes in next year’s budget.
With Moyagabo Maake and Sunita Menon