ECONOMIC WEEK AHEAD: Medium-term budget to take centre stage
Poor economic conditions lend added significance to policy statement
Though there is a range of economic data due, it is the medium-term budget policy statement on Wednesday that will take centre stage, followed by a scheduled review from credit ratings agency Moody’s Investors Service on Friday.
The 2019 medium-term budget has taken on added significance as economic growth has disappointed and the government has increased spending on parastatals, notably power utility Eskom, while the SA Revenue Service struggles to achieve tax collection targets thanks to poor growth and a legacy of governance problems.
On Wednesday finance minister Tito Mboweni will detail the full effect that the additional R59bn financial support for Eskom, announced in July, will have on the government’s finances, including its borrowing levels. It is anticipated that Mboweni will include more details on how to restructure Eskom’s debt, while the naming of a new CEO for the utility has been promised by the end of October.
Expectations from economists are that fiscal metrics, which are closely watched by ratings agencies and investors to gauge financial sustainability, will have worsened since February.
The government’s deficit is expected to rise to close to 6% of GDP, well above February’s forecast of 4.7%. Government debt to GDP is expected to be upwards of 58%, up from February’s forecast of 56.2%. The Treasury is also expected to revise down its economic growth forecast for the year from 1.5% to somewhere closer to that of the Reserve Bank, which is 0.6%.
“Years of poor management ... and state capture, aggravated by weak economic growth, will have a detrimental impact on SA’s fiscal scenario in the medium term,” said NKC Africa economist Elize Kruger.
The “significant underperformance” of the economy relative to projections in February will most likely result in a notable revenue shortfall, a growing budget deficit and higher government debt levels this year and beyond, she said.
A clearer picture of the extent of undercollections on revenue is going to emerge. According to Momentum Investments, the shortfall for the current 2019/2020 fiscal year could come in at about R50bn against February’s forecast, while Intellidex puts this at an estimated R60bn.
Given the government’s already constrained ability to borrow more or raise taxes, it will have to show how it intends to reduce expenditure in the coming years — particularly on the public sector wage bill, which accounts for 35% of spending.
Alongside the medium-term budget, Mboweni has indicated that the Treasury could give an updated version of its economic strategy document, published in August, aimed at finding ways to stimulate growth.
The budget’s outcome, as well as evidence of structural reforms and a plan for Eskom, will be closely watched by Moody’s, which is the last ratings agency to hold SA debt at investment grade, with a stable outlook. The agency indicated in September that it is unlikely to downgrade SA in the coming 12 to 18 months. But given the fiscal slippage Moody’s could change its outlook to negative, said Kruger.
The fact that the government published the Integrated Resource Plan — a 20-year electricity investment roadmap — last Friday, as well as the promise of an Eskom plan and a new CEO could mean SA avoids a downgrade, said Investec economist Lara Hodes. There is the risk, however, that Moody’s will downgrade the outlook to negative in the coming year.
A day ahead of Mboweni’s announcement, Stats SA will release the quarterly labour force survey for the third quarter. The second-quarter figures showed an increase in unemployment levels to 29%, with little evidence since then to suggest the plight of workers has improved
“The labour market remains weak with little signs of meaningful investment unfolding amid subdued confidence levels,” said FNB economics analysts. “As such, we expect that labour market prospects in [quarter three] lingered at depressed levels with both the unemployment rate and discouraged work-seekers remaining untenably high.”