Rating Mboweni’s budget: Good plan, but risks lie in implementation
This was a high-stakes budget from Mboweni. It is also a brave budget for a country in dismal fiscal trouble. It is, in fact, exactly the budget SA needs at this point
In scoring finance minister Tito Mboweni’s much-anticipated supplementary budget out of 10, we broke the answer up into three components: first, the current fiscal situation; second, the quality of the plan as outlined in the document; and third, the executability of the plan.
SA’s fiscal situation: 1/10
SA’s finances are in pretty dire shape. We have had 10 years of weak growth, courtesy of “Zumanomics”. While SA entered the 2008 global financial crisis with one of the lowest debt-to-GDP ratios in the world, we now have one of the highest across emerging markets.
The National Treasury is forecasting a main budget deficit in the current fiscal year of 14.6% of GDP and next year of 9.3% of GDP. These elevated numbers mean that SA remains vulnerable to external risks: if global markets sell off due to Covid-19, SA bonds and the rand will sell off disproportionately.
Quality of the budget plan: between 8/10 and 9/10
On the second component, the plan is good. In fact, given the dire straits SA finds itself in, the plan is excellent. We are left arguing between ourselves over whether it ranks at eight or nine out of 10.
The Treasury is budgeting for a R305bn plunge in tax revenues this year due to the fall in VAT and personal income taxes. It has found the money required to support the extra expenditures in health care and provinces.
The bond market rallied by 15 to 20 basis points after the release. This will help contain the government’s borrowing costs. We think this is due to a combination of the following factors:
There is no plan to increase local bond issuance by more than the already announced increase, from R4.5bn to R6.1bn a week, which was implemented in May. The funding shortfall will be filled with a combination of a drawdown on cash balances at the Reserve Bank, and foreign loans from a combination of the New Development Bank, the International Monetary Fund, the World Bank and perhaps the African Development Bank.
There was no deterioration in the government wage bill from the zero increase tabled in the February 2020 budget. We are not lawyers, so it is difficult to predict how the arbitration and court cases around the wage bill will turn out. However, it does seem that the court should take into account a complete lack of affordability due to drastically changed circumstances.
Beyond the R3bn budgeted for the recapitalisation of the Land Bank, there was no further allocation to state-owned enterprises. Given the large numbers being thrown out around the SAA business rescue, this is important. It would be difficult for the government to plausibly take on the wage bill if it was planning to give the state-owned airline even more money.
There is a clear attempt to stabilise the debt burden at 87.4% of GDP by 2023/2024 by significantly reducing expenditure and stimulating growth through regulatory reform.
This plan has been well processed with the cabinet, therefore it is not simply the finance minister trying to dictate terms.
While the plan is good, the risks lie in implementation. Our score for executability is about five.
The supplementary budget plans for a further R230bn reduction in expenditure in the next two years, in addition to the R160bn reduction that was announced. That leaves a total reduction of R390bn in expenditure relative to the projections of last October’s medium-term budget policy statement between 2020/2021, 2021/2022 and 2022/2023.
If this entire saving were to come from the wage bill (which is unlikely), it would require zero wage increases this year and in 2022/2023. And a 10% decline in the year that starts on April 1 2022. If government were a private company facing a 21% decline in revenues, a 10% cut in the wage bill would be imminently sensible. Many companies have opted to do just that to deal with Covid-19 – implement wage cuts and limit job cuts.
Unfortunately, government employees have different expectations.
A good start would be for President Cyril Ramaphosa to announce a significant consolidation of government departments, thereby cutting ministerial and senior manager positions. This could be an important show of good faith for union negotiations. The rhetoric from the ANC alliance partners in the coming weeks will tell us how contentious this planned consolidation will be.
The medium-term budget policy statement, scheduled for release in late October, will be key. For the executability score to rise towards nine, we also need an agreement with unions on the wage bill in the coming years.
If that is achieved and we see some concrete progress on the path to structural reform, SA bond yields could fall by 100 to 150 basis points. (For context, if SA’s borrowing costs had retained their 150 basis-point spread to emerging markets that they traded at prior to the firing of Nhlanhla Nene in December 2015, 10-year bond yields would be at 6%, and not the current level of 9.2%.)
That amounts to a saving of R10bn in the current fiscal year and R23bn in the next one on interest costs. For tangible structural reform, we only need a few steps – perhaps the removal of the blockages around renewable energy, procurement by municipalities and corporates, and self-generation and a plan for Eskom.
Exactly the tonic
This was a high-stakes budget from Mboweni. It is also a brave budget for a country in dismal fiscal trouble. It is, in fact, exactly the budget SA needs at this point.
The key is whether the president and cabinet can show as much courage as the finance minister in the coming months.
- Kent is co-head of SA & Africa fixed income at Ninety One, and Moola is Ninety One’s head of SA investments