Medium-term budget has to be a business-friendly balancing act

The Medium-Term Budget Policy Statement (MTBPS) should be business-friendly to avoid real fiscal difficulty in the next two to three years. It will require a balancing act from new finance minister, Enoch Godongwana, as well as address the debt-to-gross domestic product (GDP) ratio.

The MTBPS, scheduled for Thursday, will tell the market where the governing party is taking our finances. Economists and analysts hope to see the minister prioritise policies that grow the economy and ease South Africa out of its tight, debt-heavy fiscal position.

“All eyes will be on Godongwana to see if he keeps his predecessor Tito Mboweni’s more economically prudent policies that were designed to stimulate business growth, grow the fiscus and create jobs,” Maarten Ackerman, chief economist at Citadel, says.

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No big policy changes in MTBPS

However, he does not expect the minister to make any big changes to existing budget policies.

“Looking at where we are right now, we do not really expect big announcements regarding tax changes or any other policy changes. It will more likely be more of an update and an indication of what we can expect when the national Budget Speech is delivered in February.”

George Herman, chief investment officer at Citadel, agrees and says the MTBPS is often more about policy than nitty-gritty numbers, although it tells the market where the governing party is heading.

The South African economy has rebounded more positively over the past year than expected or budgeted in the February Budget Speech. This was partly thanks to the reopening of the global economy, supporting strong exports from the local commodities and agricultural sectors, Ackerman says.

However, he warns that we are out of the woods yet.

“It just appears far better in comparison to the worst of the pandemic. What one hopes to see is whether the minister is going to be prudent and use this opportunity to ‘bank’ some of the benefits, because we are still in a very tight fiscal position and if we fail to get the economy going very soon, we might have some further fiscal challenges in the next two to three years,” Ackerman says.

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Business friendly balancing act needed in MTBPS

They believe that Godongwana will need to balance providing sufficient support to policy items while still carefully managing policies that are intended to close South Africa’s inequality gap, such as social support, minimum wage and the proposed National Health Insurance.

The policy items drive sustainable, long-term economic growth, such as those that bolster stable electricity supply, the restructuring of ports, industrial development and remove any red tape that impact the ease of doing business.

However, Ackerman says, this is where the problem lies. “If we do not get the economy going in the next two to three years, it will be very difficult to remove that social support and if we do not get more tax revenue from a faster growing economy we will need to borrow even more.

“About 20% of South Africa’s tax revenue is already going to servicing debt, which is why the longer-term risk of a very bleak fiscal environment remains if we do not strengthen the economy urgently and broaden the tax base.”

Herman says revenue numbers for 2021 are likely to exceed the February Budget Speech numbers by about R120 billion.

“Unfortunately, the government has already begun to spend this, which is exactly where the uncertainty lies. There are several big-ticket social commitments on the cards and the question is how permanent will some of this social relief spending become?’”

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Debt-to-GDP

Regarding the debt-to-GDP ratio, Herman says it does not look like it will stabilise anytime on the medium-term horizon, as it is increasing again despite being adjusted lower thanks to the new bigger GDP value.

He also says that bond yields in the capital market are priced attractively relative to fair value which seems to indicate that the markets have priced in some risk factor and uncertainty around the MTBPS.

“Therefore, I do not expect any shocks for the bond market emanating from the medium-term budget. However, there was always a risk that if something in the medium-term budget had to ignite some form of panic, foreign investors who have been consistent sellers of South African bonds could be spurred to sell them off again. If this happened, the rand would be most adversely affected by the MTBPS,” Herman says.