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National treasury nailed it

28 October 2022 Mokgatla Madisha, Head of Fixed Interest at Sanlam Investments

The presentation of the Medium-Term Budget Policy Statement (MTBPS) should be a rather boring affair, at least it should present few surprises.

This is because there is generally enough transparency in terms of the monthly revenue and expenditure numbers. There should never be drama like we saw with the presentation of UK’s mini budget by for the former chancellor Kwasi Kwarteng. The purpose of the MTBPS should be to make adjustments to budgets for unforeseen and unavoidable events.

Leading up the budget statement presented by the Minister, the market was well aware that revenue collection was ahead of target but also that expenditure pressures were building. The minister’s task should have been to tell stakeholders how he was going to allocate the extra revenue, while managing competing demands for growth, social support and debt sustainability. Further complicating the minister’s task was the fact that the global economy is in a very different place to what it was in February, interest rates are high and still rising, inflation is high and bond markets are intolerant of errant fiscal policies.

National Treasury nailed it. The budget was well received because it prioritized debt reduction and growth. At the 2021 February budget national treasury projections were pointing to debt reaching 95% of GDP in 2025/26, however the latest forecast now shows the debt to GDP ratio to peak this fiscal year at 71.4%, substantially lower than even the February 2022 forecast and two years earlier. Budget deficits are expected to decline from -4.9% of GDP in the current year to -3.3% in 2025/26. Local capital markets will be called upon to finance about R309 billion in long-term debt every year and a further R33 billion in T-bills. If foreign investors continue to stay away from local currency emerging market debt, as they have this year, it could prove challenging.

Now turning to growth measures. There was not one mention of “Operation Vulindlela” and very few details were given on the progress of reforms mentioned previously. The lack of detail on ESKOM was particularly disappointing given the loadshedding the country has been experiencing. In total expenditure has been adjusted upwards by R57 billion in the current fiscal year with R30 billion of that as a result of support for SOEs. At last a plan has been devised to deal with the debt of the Gauteng Freeway Improvement Project. While this will provide much certainty for SANRAL going forward, one can’t help but wonder how Gauteng will maintain the roads let alone deliver on phase 2 of the project.

This budget is not without risks. National Treasury projects that cumulative revenues will be about R280 billion higher over the next three years compared to the February projections. This is predicated on nominal GDP growth averaging 6.4%. This is quite aggressive given that this year nominal GDP is expected to grow by 5.8% and in 2019, the year before the pandemic, nominal GDP grew by just 5.3%. The forecast for revenue growth of 2023/24 looks reasonably conservative but expenditure growth in the same year of just 1.65% does not seem credible, when inflation is forecast to be around 5%. When one looks at the share of revenues dedicated to servicing debt, one can see the scale of the task National Treasury is facing, in the 2025/26 fiscal year debt service costs will consume 19% of tax revenues. Furthermore, National Treasury made provision for a one year extension of the Relief of Distress grant, if this grant is to be a permanent feature then a permanent revenue source must be found to support it.

The yield on the benchmark bonds rallied between 5 and 10bps during the minister’s speech and the currency ended the day stronger against the US dollar. The markets had been trading firmer ahead of the speech.

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