In the weeks leading up to the medium-term budget policy statement (MTBPS), markets were on edge. The confusing political climate gave rise to weakness in bonds, bank shares and the rand.
After it became apparent there would be few changes at national treasury and that SA would maintain prudent fiscal policy, SA experienced a general appreciation in local assets, with international events making a positive contribution.
The strong demand for emerging-market assets and a better inflation outlook has resulted in bond yields with the 10-year note remaining below 9%. Bonds are a good litmus test for investor sentiment on policy formulation at treasury.
During his mini-budget speech, finance minister Pravin Gordhan seemed to have taken comfort in comments from the Global Markets publication, which suggest SA’s sovereign debt management is among the best in the world.
The World Bank has also weighed in on SA’s debt management framework, saying the country has the capacity to absorb fiscal shocks.
In September, international investors lapped up SA’s US$3bn eurobond, despite challenging times in the domestic economy. The eurobond issue was priced at favourable interest rates relative to the one placed earlier in the year.
National treasury has plans to tap international markets for an additional $6bn in the next three years.
Outcomes in the MTBPS remain consistent with what was expected: a focus on higher education, a tightly managed head count, weaker GDP growth, declining tax revenue, consolidated fiscal expenditure and firmly controlled debt balances.
The #FeesMustFall campaign received particular attention from Gordhan. Expenditure on tertiary education has increased substantially, making it the second-fastest-growing component of expenditure in the budget (9.2% over the next three years).
Financing costs on debt are rising fastest, at 10.1%, because of the depreciation of the rand and the increasing stock of debt.
An additional R17bn has been set aside for universities and students.
The number of national and provincial employees has plateaued at about 1.25m. Since 2012, there has been no noticeable increase in head count. However, wage growth remains firmly above the upper 6% inflation target range. According to data from the SA Reserve Bank, unit labour cost growth averaged 7% between 2010 and 2015.
This is forecast to accelerate to almost 8% in 2016. Pre-agreed public-sector wage deals, which run for multiple years, are the main contributor to this outcome.
Treasury has recognised that guarantees set aside for state-owned enterprises (SOEs) make the state vulnerable. As it is, the state has committed R467bn in guarantees for SOEs. The lion’s share of this is earmarked for Eskom.
The power utility recently received a $500m loan — with the potential of an additional $4.5bn from the China Development Bank. While the loan will fund Eskom’s capital expenditure plans, the implicit guarantees behind the loan will attract attention from investors, as contingent liabilities could become real liabilities in the event of default.
It was not clear in this MTBPS whether there would be additional guarantees, as these could have negative consequences on debt accumulation.
Rand depreciation and weak GDP growth mean debt remains elevated.
It was encouraging to see that the medium-term expectation for the net debt-to-GDP ratio will taper off at about 49%. GDP growth sustained at higher levels, say 3%, is one of the most potent ways of dealing with escalating debt levels.
Tax pronouncements are usually made in the February budget speech. In February, capital gains tax, transfer duties on high-end real estate and taxes on sugary beverages were imposed. This was deemed a “tax-light” outcome.
It remains to be seen whether additional taxes will be introduced. There is a chance a higher income tax bracket — or even a direct wealth tax — will be introduced next year.
With such weak domestic economic activity, tax hikes are likely to prove corrosive to growth. During the past five years, SA’s household savings ratio contracted to more than 1% of disposable income, reflecting the disincentive of higher taxes.
Increasing taxes is not a solution to SA’s weak growth.
Most of the forecasts in the MTBPS hinge on raising economic growth, to about 2% in the next three years. Though SA enjoys a global tailwind from better Chinese GDP outcomes and relatively stronger export growth, the metrics on fiscal policy can change drastically, should these positive forces dissipate.
• Mothata is chief economist at Investment Solutions