• Sanisha Packirisamy

Supplementary budget lays bare the challenges ahead

Momentum economist and head of financial advice weigh up the holes in the budget, look at the challenges ahead and share insight on how to address these with professional consulting

Key take-outs

  • Debt was the word in Wednesday’s emergency budget

  • Government spend on debt almost in line with what it spends on health

  • Lack of detail on funding debt repayment, public sector wage bill, flailing SOEs and zero budgeting “silver bullet”

  • Back to basics critical in terms of recalibrating financial plans

  • Refrain from being “bullied” in product selling where one benefit is replaced with another

Finance minister Tito Mboweni painted a bleak economic picture in his supplementary national budget presented on Wednesday 24 June 2020. As South Africa slowly opens up its economy, subsequent to one of the longest and strictest COVID-19 lockdowns on the globe, the scale of devastation wrecked by these measures, on an already struggling economy, are becoming apparent.

“From an economic perspective we are in unchartered waters.” says Sanisha Packirisamy, economist at Momentum Investments. “Treasury is forecasting a budget deficit of 15.7% of gross domestic product (GDP) for FY20/21. This is driven by a forecasted R299 billion revenue shortfall and an additional R43.2 billion allocation to expenditure. The fiscal deficit is also expected to be 4.2% wider on average in the medium-term expenditure framework (MTEF) between FY20/21 and FY22/23.”

This deficit will have to be funded with debt and South Africa’s gross debt ratio is expected to rise to 86% of GDP in FY22/23 (previously 71.6%). On average the debt ratio is expected to be 14.5% higher over the MTEF.

“Our debt levels are unsustainable,” continues Packirisamy. “Debt-service costs absorb 21c of every rand government collects relative to 9c in FY08/09 and our interest bill is expected to rise from 4.9% of GDP in FY20/21 to 5.4% of GDP in FY22/23. To put this into perspective, the allocation to debt-servicing costs is now similar in size to what government spends on health and is double the share being spent on capital assets.”

Treasury also announced that it is accessing US$7.0 billion (R118bn) from international finance institutions to finance the COVID-19 stimulus package. Packirisamy explains that this comprises a US$4.2 billion Rapid Financing Instrument from the International Monetary Fund, US$1 billion from the New Development Bank and US$50 million from the World Bank. No detail was given on how the remainder would be funded.

“What is of particular concern is the fact that there does not seem to be a concrete plan of action on proposed structural reforms to get us out of this quagmire,” notes Packirisamy. “Little detail was given on the current negotiations between government and the unions on the public sector wage bill, for example, and we are no closer to understanding what the zero-based budgeting approach treasury is expected to adopt looks like.”

What complicates matters further she notes, is that state-owned enterprises (SOEs) and municipal finances remain in disarray. Metropolitan municipalities reported that revenue collected in April fell by 30% on average as a result of higher non-payment by customers and this places local governments deeper in financial stress.

“In terms of our SOEs, the February 2020 national budget already included an additional R16 billion allocation to SA Airways and another R10 billion may come through in the October budget, once the business rescue plan has been finalised. A R3 billion equity injection into the Land Bank was also announced by the finance minister. However, despite lockdown restrictions lowering revenues for the majority of SOEs, no other intra-year spending adjustments were proposed.”

Treasury did note the SOE reform included rationalisation and equity partnerships, but the market remains sceptical about the political will required to facilitate these changes.

“In terms of recovery, infrastructure spending is at the centre of government’s economic recovery plan. However you n