2019 Budget Review - Structural reforms outweigh decimal points deteriorations in the figures
Finance Minister Tito Mboweni’s maiden Budget speech is a structural reform budget, which aims to reduce the immediate fiscal and economic risks posed by Eskom’s and other State Owned Enterprises’ (SOEs) unsustainable balance sheets and operational models. Without a doubt, the fiscal numbers show a marginal deterioration when compared with the 2018 Medium Term Budget Policy Statement (MTBPS) and slightly more so if we compare with the 2018 Budget Review. The consolidated budget deficit for FY2018/19 slips to 4.2% of GDP from the 2018 MTBPS’s forecast of 3.6%, rising to 4.5% of GDP in FY2019/20 before moderating to 4.0% by FY2021/22. The debt-to-GDP ratio now stabilises at 60% of GDP in FY2023/24, which is slightly higher than the 59.6% previously projected.
These decimal points deterioration in fiscal numbers, in our view, are a necessary slippage to allow reform packages that will create a more stable and predictable operating environment. Our overall assessment is that this was a tough budget but it is realistic and addresses the risks posed by Eskom and a large public sector wage bill. The main figures from the budget are as follows:
In line with our expectations, National Treasury forecast real economic growth to improve to 1.5% and 2.0% in 2019 and 2020 from an estimate of 0.7% in 2018, reflecting weaker global growth, low private sector investment and reduction in government spending.
Due to the downward revision in economic growth, there are tax revenue shortfalls compared to the 2018 MTBPS projections - R15.4bn for the 2018/19 fiscal year and R16.3bn for the next three fiscal years combined.
In addition to tax revenue shortfall, R75.3bn in new spending has been provided for over the medium term, which comprise R69bn for Eskom restructuring, R5.0bn for the infrastructure fund and R1.3bn for the 2021 Census.
The South African Post Office has been allocated R1.5bn for the next three years in addition to the R2.9bn allocated for the current fiscal year in the 2018 MTBPS.
There are no provisions to support other State Owned Companies (SOCs) such as SAA, SABC and Denel directly from the budget. Any request for financial support will be funded from the sale of non-core assets in a way that does not raise the expenditure ceiling.
For any emergency financing requirements for SOCs, the contingent reserve was increased by R6.0bn in FY2019/20 but reduced by R2.0bn and R6.0bn in the following two years.
To offset the R75.3bn increase in government spending, a combination of a R50.3bn in government expenditure cuts and R25bn in new tax revenues, which are mainly raised from not adjusting for tax brackets for inflation, will be implemented over the next three years.
The expenditure ceiling has been raised by R16.3bn to R1.6tn over the medium term 2018 MTBPS estimates, with R14bn of that in the current FY2019/20.
The revenue underperformance drives the consolidated fiscal deficit, which includes spending by provinces, social security funds and public entities financed from their own revenue sources, to 4.5% of GDP in FY2019/20, before moderating to 4.3% and 4.0% in FY2020/21 and FY2021/22.
The main budget deficit, which excludes spending by provinces, social security funds and public entities financed from their own revenue sources, increases to 4.4% of GDP in FY2018/19 compared with the 2018 budget forecast of 3.8%, due to tax revenue shortfall. For FY2019/20, the main deficit is projected to widen to 4.7% of GDP before narrowing to 4.5% and 4.3% in the next two fiscal years.
The gross debt-to-GDP stabilisation at 60% of GDP in FY23/24 from a previous estimate of 59.6% of GDP.
There are no adjustments in the main tax revenue sources given the constrains of weak corporate earnings and job losses.
We do not expect Moody’s to change the Baa3 credit rating nor the stable outlook this March when it reviews the country’s rating.
This budget sets a good base for stabilising the local operating environment that will enable a conducive investment climate. However, the short term outlook will remain challenging on account of still weak economic growth environment, implying little recovery in corporate sector profitability, which in turn translate to potential job losses.
Over the longer term, we believe that the focus on infrastructure investment will provide more opportunities to diversify into private markets, thus enhancing return expectations or providing protection for future traditional asset class return downturn.
To be conducive, stable and predictable, the economic environment requires security of energy and a capable state among a host of other regulatory reforms. In this respect, the R69bn Eskom funding for the next three years to facilitate its restructuring is a required step in the reform of the energy sector. What is more encouraging is that any funding request from other SOCs including SAA, SABC and Denel will be achieved through the sale of non-core assets. Over the short term, any funding pressure will be relieved from the contingent liability reserve.
One of the longstanding issues has been the bloated public sector wage bill. In this budget, National Treasury has budgeted for a R50.3bn decrease in public spending, largely reflecting a decline in the salaries and wages due to natural attrition and early retirement without penalties. Treasury projects that it will achieve cost savings of R47bn over the medium term on the wage bill.
Given the weak economic growth, there are no adjustments in the main tax revenues – personal income tax, VAT and corporate income tax. This will help in cushioning consumers who have seen an increase in the cost of living for the past couple of years.