“Mini Budget” preview – mini in name only


POSTED ON: October 28, 2019 IN by Admin

In years past, this week’s speech – that doesn’t carry as much weight as the February budget – was primarily seen as a marker in calendars of just when the state would be unofficially going on its summer holidays. It couldn’t be more different now as it will serve as a statement of intent of Ramaphosa’s first administration, and perhaps the constant date changes bear testimony to its importance – we hope.


This piece was first published in Business Day.

By Busi Mavuso

LAST year’s medium-term budget speech was more about the drama around the internal party politics of the governing party than our fiscal state. We had a reluctant Tito Mboweni taking up the reigns as finance minister and being rushed into the seat after the unfortunate but admirable resignation of his predecessor, Nhlanhla Nene. This week it’s the state of opposition politics that grabs the headlines – the effects of which we’ll probably see in years to come.

But to this week’s main event: the medium-term budget policy statement (MTBPS) or “mini-budget” is a term that Treasury veterans have never warmed too. For us in the business community, this speech is about clawing back credibility.

This task is made all the more difficult with South Africa falling two places to 84 in the World Bank’s influential Ease of Doing Business index. President Cyril Ramaphosa has targeted a position of 50 of about 190 countries ranked within the next three years

In years past, this week’s speech – that doesn’t carry as much weight as the February budget – was primarily seen as a marker in calendars of just when the state would be unofficially going on its summer holidays. It couldn’t be more different now as it will serve as a statement of intent of Ramaphosa’s first administration, and perhaps the constant date changes bear testimony to its importance – we hope.

For all the talk of focusing on structural reforms that has been the clarion call of his administration, as well as the intent to break with the narrative of the past decade of distrust with the public purse because of corruption scandals, this medium-term budget is the first step in rebuilding credibility in the politics that shape the work within Treasury. It comes at an opportune time given global concerns over economic growth in the world’s developed markets. Investors are once again focusing on the fundamentals of emerging market economies such as ours.

But with an economy growing below 1% this year and a revenue collector set to miss targets for yet another year, it’s sixth in succession, South Africa’s fiscal space continues to shrink. We expect a hole of between R50bn and R60bn caused by higher VAT refunds and, mainly, low growth.

If in this environment we are still to receive star billing when the world’s capital markets look for areas of investment, prudent fiscal management will have to be at the centre of our sales pitch. This is understandably a significant challenge as South African politics remain hotly contested with vested interests in virtually every sphere of government. None more so than in the funding of our state-owned enterprises and in particular, Eskom. We’ve been primed to receive some news around the long-term solution of the state electricity provider’s crippling debt load that is nearing half a trillion-rand. One suspects that whatever their fixes, the political standing of Mboweni and his president, who’ll be seated just few meters from his podium on Wednesday, will be severely tested.

Mboweni may have won over the ANC’s National Executive Committee with his surprise economic policy proposals more than a month ago, but he doesn’t have connectivity in the party. But that may just be his advantage: his distance from the party may provide the space for difficult and unpopular choices to be made, with the backing of his boss.

There are really few choices for Eskom with the state either having to borrow or sell the family silver to fund its debt, which has ratcheted up on a badly executed power expansion. One recalls Nene having to sell the state’s almost 14% stake in Vodacom, valued at R23bn, to the Public Investment Corporation to fund Eskom. The bailouts that have followed have not been deficit neutral.

There are still increasing levels of contestation over the issue of Eskom, even at this late hour. Question marks remain over the separation of the entity into three parts with no substantive movements there, although this may have been complicated by a search for a new chief executive.

On a final debt solution, where the chief restructuring officer was expected to feature, Treasury has instead been advised by an external service provider. As such, we are worried that whatever Treasury puts forward as a funding solution in the medium-term budget speech could possibly fall apart with contestation afterwards. At best, implementation will be delayed.

Our hesitation is based on past experience. In February’s Budget, the Eskom appendix speech was cut at the last minute due to political contestation. With credit ratings agency Moody’s – the last of the big three that has us above “junk” rating – coming out with its review just after this week’s budget speech, we hope our cynicism is proved wrong.

There have been numerous leaks recently from Treasury officials about the government weighing up various options to support Eskom, including swapping its debt for government bonds or ringfencing it in a special purpose vehicle. The latter option carries the most support – but such a move would simply shift Eskom debt off its balance sheet and onto the sovereign; at least that’s what investors would eventually deduce.

But never mind some of our reservations; what markets and investors are most eager for is an end to uncertainty around the long-term debt commitments. If the medium-term budget, much like the release of the Integrated Resource Plan a few weeks ago, can provide a level of certainty, it would be a victory.

As we’ve said, Mboweni’s speech is one to claw back credibility. The wage bill is certainly another element that we’ll pay close attention to. There’s a high probability of some small cuts in the wage bill, but politically this will be a minefield for Treasury to navigate.

We don’t expect Moody’s, on the evidence of this medium-term budget speech, to change its ratings on the country but it, much like the business community, will want Treasury to take the lead on plans for the future funding of state-owned enterprises. We’ve long since passed the point of ideological debate: credibility dictates that there is a decision made now and acted upon in February’s budget.


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