Tito Mboweni. Picture: ESA ALEXANDER
Tito Mboweni. Picture: ESA ALEXANDER

Barely three weeks into the job, Finance Minister Tito Mboweni’s first medium-term budget policy statement will be a baptism of fire. The statement, most of which was drafted under the leadership of former finance minister Nhlanhla Nene, has a lot riding on it.

The medium-term budget is a plan of the government’s strategic spending priorities over the next three years. After a disastrous medium-term budget was presented in 2017, the pressure is mounting.

Mboweni, who was the Reserve Bank governor a decade ago, is unlikely to be a deer in the headlights this week when he delivers the statement, given his wealth of experience working alongside the National Treasury. It is, however, unusual for a finance minister to have so little time to prepare such an important policy statement.

The consolation is that any tough decisions that need to be made will be presented in February’s budget. Mboweni’s biggest challenge now will be to present a credible statement that staves off any further credit rating downgrades. Analysts say he will probably stick to Nene’s script.

Mboweni won’t make the same mistake former finance minister Malusi Gigaba did in his maiden medium-term budget statement when he strayed from fiscal consolidation, triggering a downgrade from Standard and Poor’s (S&P) further into junk status and grim statements from the other credit rating agencies, following a notable increase in projected debt-to-GDP levels.

Fiscal policy is unlikely to change significantly under Mboweni, and he is likely to place emphasis on tightening government outlays across the public sector. Additionally, the success of the upcoming MTBPS [medium-term budget policy statement] will be determined by how a R400bn infrastructure fund will be financed.
Langelihle Malimela
IHS Markit senior research analyst

The February budget this year outlined a series of measures to rebuild economic confidence and return public finances to a sustainable path, including R85bn in spending reductions and various tax hikes, most notably the first VAT increase since 1993.

“February’s budget proposals suggested a considerably narrower budget deficit than was presented in October last year, indicating a path to debt stabilisation over the long term. To be viewed as credit-positive, a similar outlook should be presented in October, which would reiterate a commitment to fiscal restraint in the face of difficult prioritisation decisions,” says PwC economist Maura Feddersen.

Close attention will be paid to how President Cyril Ramaphosa’s economic stimulus plan will be presented. He was scant on detail when he announced the plan at the end of September.

SA’s borrowing capacity is limited and a reprioritisation of spending is expected to stimulate the flailing economy after SA entered a recession for the first time since the global financial crisis.

“Fiscal policy is unlikely to change significantly under Mboweni, and he is likely to place emphasis on tightening government outlays across the public sector. Additionally, the success of the upcoming MTBPS [medium-term budget policy statement] will be determined by how a R400bn infrastructure fund will be financed,” says IHS Markit senior research analyst Langelihle Malimela.

He believes Mboweni will follow a conservative path and instil fiscal discipline across the government, as expected of Nene before the cabinet reshuffle in 2015.

“It is highly unlikely that Mboweni will significantly depart from the plans prepared by Nene for the MTBPS, nor do we expect him to depart from the broad outline set out by Ramaphosa for the economic stimulus and recovery plan,” Malimela says.

A key priority for the markets and credit rating agencies will be whether public sector expenditure can be reined in. Nene had already warned that there will be downward revisions to the  Treasury’s growth forecasts and the Bank expects lacklustre growth of 0.7%.

“Mboweni will face the task of affirming the government’s commitment to fiscal consolidation and strategic investment in the face of low economic growth,” says Feddersen.

Consolidation measures that narrow the budget deficit and achieve a substantial reduction in the government debt-to-GDP ratio are deemed credit-positive by ratings agencies.

While SA has received a reprieve from Moody’s Investors Service so far this year, the statement will be an important indicator of what is to come in 2019. Mboweni received a vote of confidence from Moody’s on Tuesday.

“While the change in the minister of finance a few weeks before the MTBPS may lead to last-moment changes in policy implementation, we would not expect the broad direction of policy to be dependent on individuals, in particular given that institutions in SA have proven resilient to challenges in recent years,” said Moody’s vice-president Lucie Villa.

According to Feddersen, ratings agencies will look out for a continued commitment to fiscal consolidation; pledges to reform state-owned entities, whose debt has grown rapidly, with large government guarantees and their long-term viability increasingly presenting a fiscal risk; and the measures announced to re-ignite growth in the economy.

The consensus among analysts is that Moody’s is likely to wait until 2019 before making a move.

“We expect Moody’s to keep ratings unchanged this year and only downgrade the outlook after next year’s budget as further budget and downward-growth surprises come to a head, with limited signals of further reforms,” says Intellidex analyst Peter Attard Montalto.

However, Moody’s will likely continue to give SA the benefit of the doubt around growth-positive reforms to come in the lead-up to the election, he said.

Mboweni, who is lauded by the markets and business and political spheres, doesn’t look set to rock the boat anytime soon. SA may live to fight another day.