BUDGET IN A NUTSHELL: Doom, gloom and yet more Eskom blues
Eskom’s financial and operational crisis loomed large as finance minister Tito Mboweni delivered a gloomy budget that showed a deterioration in SA’s finances and economic outlook, which may raise the ire of ratings agencies.
Delivering his first budget speech since he returned to the cabinet in October, Mboweni predicted that budget deficits would be wider than expected four months ago owing to a weak economy, another shortfall in revenue collection and the need to set aside more cash for the ailing state-owned enterprises (SOEs).
Local risk-assets sold off sharply within a few minutes of Mboweni beginning his speech, with the yield on the benchmark R186 government bond rising to a two-month high.
The rand had been trading at R14.16/$ shortly before the minster began speaking. At 2.15pm it had fallen 2.27% to R14.3661/$, while the yield on the government’s 10-year bond, due in 2026, rose above 9% for the first time since December 2018.
The R186 was bid at 9.05%, 2% weaker than its close of 8.865% on Tuesday.
Speaking in a press conference on Wednesday, he said Treasury officials had already been having “very, very difficult conversations” with ratings agencies and would be going on a roadshow next week in an attempt to show them that the steps being taken by the government were necessary to fix the country’s finances in the long term.
If we are doing practical things to fix Eskom and the electricity sector, then in my view that should be seen as a positiveTito Mboweni
“If we are doing practical things to fix Eskom and the electricity sector, then in my view that should be seen as a positive,” Mboweni said. The same applied to steps to contain wage growth in the public sector and the fact that inflation would stay within the Reserve Bank’s 3%-6% target range, he said.
The budget deficit for 2018/2019 would be 0.2 percentage points higher than the 4% pencilled in in the medium-term budget policy statement (MTBPS), and then is projected to shoot up to 4.5% in the following year. Over the medium term, government debt will peak at a higher level, with the debt-to-GDP ratio set to reach 60.2% in 2023/2024, compared with the previous estimate of 59.6%. Net debt is projected to peak at 57.3% a year later.
“The main risks to the fiscal outlook are uncertainty in the growth and revenue forecasts, the contingent liabilities of state-owned companies and the public-service compensation budget.”
From tough talk on saving Eskom and Sars, to increases on tax on alcohol and cigarettes - we take a look at which aspects of Finance Minister Tito Mboweni’s 2019 budget will hit close to home.
A legacy of failure and mismanagement at the SA Revenue Service (Sars) also loomed large, with the government expecting collection to fall short by almost R43bn for the current fiscal year, worse than the R27.4bn shortfall predicted in October.
Revenue was also hit by “persistently weak economic activity”. After the failures of recent years, Treasury officials reiterated that potential improvements in coming years as Sars’s capacity improves have not been factored into future years, which may mean the revenue projections turn out to be too pessimistic.
That is part of the message they will be taking to Moody’s, the only major ratings agency that has SA on investment grade and is scheduled to release its next outlook on SA late in March.
Economists have previously said that Moody’s is likely to wait until after the May elections before pronouncing on the rating. A downgrade would see the country falling out of key indices, prompting outflows that could see the government’s borrowing costs balloon.
A saving grace for SA might be that that the agency’s growth estimate for 2019 was, at 1.3%, already less pessimistic than those of the government.
A downgrade, and the resulting increase in bond yields, would see more of the nation’s resources being diverted towards creditors and away from key services such as health and education.
As it is, SA is scheduled to spend about R1bn a day on interest payments. The projected budget deficit for the year means the country will have to borrow about R1.2bn a day, assuming it doesn’t take more debts on weekends, Mboweni said in his speech to parliament on Wednesday.
A downgrade would see the country falling out of key indices, prompting outflows that could see the government’s borrowing costs balloon
The main culprit for the fiscal situation taking a turn for the worse is a dismal growth outlook that sees the economy growing just 1.5% in 2019, down from a previous forecast 1.7%, with an even sharper downgrade of 0.4 percentage points to 1.7% in 2020, a far cry from the 3% rate President Cyril Ramaphosa targeted when he replaced Jacob Zuma just more than a year ago. The outlook for the 2018 fiscal year was unchanged at 0.7%.
“Many of the risks that we warned about have materialised,” Mboweni said, also citing expectations that the world economy will slow, constraining the country’s ability to boost export earnings.
Pouring money into the Eskom sieve
As widely expected, a significant portion of the budget announcement was dedicated to Eskom, which recently reintroduced load-shedding that cost the economy an estimated R1bn a day. The government set aside R69bn over the next three years for the utility, which supplies virtually all of the country’s energy and has been identified as the biggest risk to the economy.
“Pouring money into Eskom in its current form is like pouring water into a sieve”, so the aid would come with heavy conditionality, including the appointment of a chief reorganisation officer, who would be tasked with delivering on the recommendations of the task team set up by Ramaphosa in 2018, Mboweni said. That person would not be there to undermine the board or the CEO, but would be the “eyes and ears” of the government to ensure reform was carried out.
Treasury officials estimated that Eskom, whose debt has ballooned to R475bn and cannot be serviced through its revenue generation, would need balance sheet support of about R150bn and the government had provisionally set aside R23bn a year over the next decade to support it, conditional on it implementing tough structural changes aimed at making its business sustainable.
Treasury officials estimated that Eskom, whose debt has ballooned to R475bn and cannot be serviced through its revenue generation, would need balance sheet support of about R150bn
While there were no specific allocations for SA Airways (SAA), Denel and the SABC, all of which have appealed for state assistance, the government has set aside an extra R6bn.
There was good news on the wage bill, with employee numbers dropping faster than the government expected. Monthly payrolls in 2018 were on average about 16,000 less than in the corresponding months in 2015.
On tax, the government shied away from increasing any rates, with the budget noting that “large increases” in recent years had not translated to big improvements. In fact, revenue as a proportion of GDP began to drop. Instead, the government will increase collection by not adjusting tax bands for inflation, meaning that workers who get pay rises will not be compensated for going into higher-tax brackets, accounting for the bulk of the extra R28bn in revenue it aims to raise for the next two years.
Taxpayers, and Reserve Bank governor Lesetja Kganyago, might be happy with Mboweni pledging that MPs will lead by example and not get salary increases in the current fiscal year, together with provincial legislators and senior executives at SOEs.