MTBPS – moving on from the credit crisis

Revenue to surprise on the upside

We seem to be going back to the era where revenue surprises on the upside. When Finance Minister Pravin Gordhan announces his Medium Term Budget Policy Statement (MTBPS), we estimate that the revised revenue for this year could exceed the budgeted R643 billion by some R45 billion. This enormous improvement is largely due to the expected outperformance of corporate tax by some R20 billion and VAT by roughly an equal amount. The other revenue items have also been solid, but the budget technicians managed to get those estimates closer to the mark.

Expenditure to beat budget by small margin

There are no signs at this stage to indicate that we will see any major expenditure overruns. The outcome of the strike was of course well above the amount provided in the budget, but it is not clear that the consequences will be evident this year as a major saving will come if the ‘no work no pay’ rule is implemented effectively. We expect expenditure to exceed the budget by a small margin of around R5 billion.

Deficit just shy of 5% of GDP

This means the deficit will end up R40 billion less at something like R135 billion, which will be just shy of 5% of GDP, and much better than the budgeted 6.5%. The question is what Minister Gordhan will do with the extra R40 billion. It does of course open up scope to issue less debt in the market and we suspect that the weekly Treasury auctions might go down by about R200 million on the part of conventional bonds and R200 million on the part of inflation-linked bonds.

This would however only absorb some R8 billion of the R40 billion. Foreign reserve accumulation and consequent sterilisation has already claimed R7 billion and given the pressure on the currency, it is probably reasonable to assume that Treasury may burn a further R2 billion a month for sterilisation purposes. Further currency intervention will probably be confined to the swop market. Any remaining amounts might go towards prefunding or possibly Eskom, although it doesn’t seem as if Eskom will need extra cash right now.

Medium-term adjustment underway

Looking ahead to the next two to three years, the better than expected outcome for this year’s budget creates the scope for the finance minister to bring the budget deficit down faster than was previously scheduled. He would probably now aim for a deficit for next year of something like 4.5% (rather than the 6% plus of the previous medium-term framework) and 4% in the following year. This would enable South Africa to complete the necessary post credit crisis fiscal adjustment, relatively painless compared to the UK, which is preparing for the trauma of astronomical cutbacks in government spending.

Steps to curb the rand – significant excon relief?

The most sensitive part of the MTBPS will centre on the steps Government is likely to take with regards to the pressures on the currency. A tax on foreign investment like the Brazilian tax is certainly being discussed in the corridors of Government, but it is doubtful that a decision has been made. In any event, the legislative framework to implement a tax like this doesn’t seem to be in place.

This leaves exchange control relief as the main focus area. We believe the Minister will have some surprises in store for us on this front and we may see significant steps to ease exchange controls with regard to companies and banks. Individual allowances could move up quite significantly and there is a small chance that prudential limits on institutions may be raised.

Exchange control relief will not satisfy all the political constituencies of the ANC, but it is nonetheless the one thing that the Minister can do here and now to bring some relief to the capital account pressures on the rand.

Announcement on Regulation 28 likely

The Minister may also use the occasion of the MTBPS to release a revised draft of Regulation 28 Guidelines. These are the rules that govern the investment portfolios of the pension fund industry, and will be a focal point of the MTBPS for institutions and investment managers.