The hat trick that avoided junk status
By all accounts, the 2016 Medium Term Budget Policy Statement (MTBPS) was measured, responsible and called for fiscal discipline as the country tries to recover from the tough economic position that it finds itself in.
But did Finance Minister Pravin Gordhan do enough to convince ratings agencies to forgo a downgrade to junk status?
The two certainties
In a statement to the press, Lesiba Mothata, Chief Economist at Investment Solutions, said that Gordhan confirmed that South Africa remains on a prudent fiscal management path. “The MTBPS remains consistent with what was largely expected: weaker gross domestic product (GDP) growth, declining tax revenue, consolidated fiscal expenditure and firmly-controlled debt balances,” said Mothata.
The fact that we are facing declining tax revenue doesn’t mean that we will not see movement in this sector. At the end of the day, the only two certain things in life are death and taxes.
“Tax pronouncements are usually made in the main budget announcement, which in February 2016 introduced capital gains tax, transfer duties on high-end real estate and taxes on sugary beverages. This was deemed a tax-light outcome. It remains to be seen whether additional taxes will be introduced. There is a chance that a higher income tax bracket, or even a direct wealth tax, will be introduced next year,” said Mothata.
Fiscal decline
The South African economy has been on the decline for a while now, and according to Lullu Krugel, Chief Economist KPMG South Africa, this looks set to continue for the meantime.
“The MTBPS indicated that the fiscal deficit will narrow from 3.7% of gross domestic product (GDP) in 2015/16 to 3.4% of GDP in 2016/17. The latter number is 0.2% points higher than planned in the 2016/17 budget speech, though the increase is in line with economists’ expectations. The budget shortfall is projected to narrow to 2.5% of GDP – seen as a sustainable level – by 2019/20. However, Gordhan acknowledged that budgets tend to be optimistic about outer-year forecasts. Just two years ago, the National Treasury projected GDP growth of 3.5% in 2016/17, and its current projection for this year (0.5%) is also above that of most local economists,” said Krugel.
On a positive note, fiscal consolidation in recent years will result in a primary surplus during 2017/18 – this means that government revenue will be higher than non-interest spending.
Education and wages
Traditionally, the MTBPS is not a platform to make any budgetary announcements. It is merely a look back on the health of the economy.
However, rampaging students imploring for free education has forced governments hand on this issue. Mothata points out that expenditure on post-school education has increased substantially, becoming the second fastest growing component of expenditure at 9.2% over the next three years.
“An additional R17 billion has been set aside for universities and students, with a notable increase in National Student Financial Aid Scheme (NSFAS) allocations, which will be growing 18.5% in the next three years,” said Mothata.
Wages also came under the spotlight. The number of national and provincial employees has plateaued at around 1.25 million. Since 2012, there has been no noticeable increase in head count. Wage growth, however, remains firmly above the upper 6% inflation target range.
According to data from the South African Reserve Bank (SARB), between 2010 and 2015, unit labour cost growth averaged 7% and is forecast to accelerate to almost 8% by the end 2016. Pre-agreed public sector wage deals, which run for multiple years, is the main contributor to this outcome.
Junk avoidance?
The big question is: has Gordhan done enough for the country to avoid junk status?
“In their assessments of sovereigns, rating agencies consider a country’s institutions, economic scenario, fiscal and debt dynamics, monetary policy and the external environment. If it is assumed that Standard & Poor’s will be happy with the MTBPS 2016, that still leaves the economic scenario and quality of institutions to worry about,” said Krugel.
Gordhan came down hard on State Owned Enterprises in the MTBPS, time will tell whether this rhetoric sets alarm bells ringing in these institutions.
Mothata adds that there is little in this MTBPS that will cause ratings agencies to recommend severe downgrades of South Africa’s credit.
Gordhan quoted Kofi Anan saying: in promoting development and making the world a better place for all, we are called upon to reaffirm the importance of core values such as honesty, respect for the rule of law, accountability and transparency. Are these words prophetic or Gordhan’s final warning to government leaders that they need to ship up or they will be shipped out?
Editor’s Thoughts:
So we may avoid junk status; but for how long? We wait with baited breath to see. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
