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PPS Investments: National Budget Speech Commentary

27 February 2020 Reza Hendrickse, Portfolio Manager at PPS Investments
Reza Hendrickse, Portfolio Manager at PPS Investments

Reza Hendrickse, Portfolio Manager at PPS Investments

The widespread view coming into this year’s Budget Speech, was that it needed to credibly steer us towards growth, while also addressing the growing fiscal deficit and lowering the debt trajectory. This is no easy task, but is precisely what South Africa desperately needs.

This year’s Budget carried an additional burden of needing to appease Moody’s, with our investment grade credit rating hanging in the balance. Finance minister, Tito Mboweni boldly commented that he thought the budget did enough to maintain Moody’s patience, but this is by no means certain.

Expectations ahead of the budget predicted some combination of tax hikes in the major areas (personal, corporate and VAT), expenditure cuts and economic reforms to boost the growth. However, no major tax increases were announced. Only a few minor tweaks such as inflationary adjustments to excise duties, fuel levies and a higher plastic bag levy etc. This was a far cry from what many had previously predicted; a second VAT rate increase, alongside increased taxes geared towards the wealthy.

South Africans can look forward to lower taxes, with some personal income tax relief. The corporate income tax rate will also be reduced in the near future, with the aim of helping businesses grow. In support of the property market, the transfer duty threshold was adjusted, with properties valued at less than R1m no longer subject to transfer duty.

The finance minister exceeded expectations with the announcement of a R160 billion adjustment to the wage bill over the next 3 years. The bloated public-sector wage bill is widely seen as the most prominent area where expenditure curtailment is needed, so the news was welcomed. The saving could be viewed as ambitious however, and was in fact at the top end of what many had predicted. Regardless, it shows a clear intention to address public sector wages.

Markets seemed to breathe an initial sigh of relief on the delivery of this year’s Budget Speech, with the rand strengthening, and stocks and bonds climbing. Taking a step back however, while the policies aimed at supporting growth are vital to kickstart growth, and the R160 billion wage bill reduction is exactly what is needed, the fiscal deficit remains worrisome at 6.8%. In the short term, the deficit is slightly worse than what had previously predicted, but a slight improvement is predicted further out.

It is sobering that despite this years’ positive budget interventions, the current 65% debt to GDP level is still projected to exceed 70% by 2023, which remains on the path towards unsustainable levels. Even with the positivity on the surface of this years’ Budget, the reality is that we may still only be tinkering at the margin if we consider the current debt trajectory. It is a close call as to whether Moody’s will once again give us the benefit of the doubt.

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