MTBPS expectations: growth, reform and … Eskom

The MTBPS expectations are that it will prioritise policies that will grow the economy, introduce fiscal reform and give more clarity about Eskom’s debt while avoiding political pressure to manage economic distress by spending on social relief or public sector wages although inflation is spiking and growth is depressed.

When finance minister Enoch Godongwana delivers his Medium Term Budget Policy Statement (MTBPS) next Wednesday, he will have to focus on policies that accelerate real economic growth and address the financial future of Eskom, Maarten Ackerman, chief economist at Citadel, says.

“All eyes will be on Godongwana to see if he will prioritise pragmatic policies that stimulate real business growth and job creation, instead of bowing to populist pressures that prioritise social spending but have no lasting positive impact on the country.”

He says South Africa is still stuck in a balancing act between weak growth and populist needs that will continue indefinitely, such as the Basic Income Grant, as it is vital that the country gets the economy going to address poverty and inequality in a sustainable way.

“In terms of South Africa’s macro-economic outlook, it is essential to note that there was yet another revenue windfall in addition to the revenue overruns in recent years. Therefore, we have to see what the finance minister does with that. We would like to see the windfalls used productively and not just on once-off, temporary social spending that does little to nothing to drive economic growth.” 

Ackerman says he also hopes for a proper update on the fiscal reform in the pipeline and whether there has been tangible progress. “In terms of our debt-to-GDP ratio, how they use, or misuse, the revenue overrun is extremely important, because our debt-to-GDP ratio is already far higher than ever over the past decade.

“The deficit also poses a risk and therefore the fact that we see slightly better numbers does not mean the difficulties are behind us. If anything goes belly up, we will be close to the fiscal cliff that minister Tito Mboweni warned us about again.”

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Dealing with Eskom in MTBPS

George Herman, Citadel’s chief investment officer, also urges Godongwana to deal with the Eskom situation. “We would appreciate any guidance the finance minister can give in terms of the intention to deleverage the Eskom balance sheet. I think and hope that is going to be a core focus of the 2022 MTBPS.” 

Eskom asked government to relieve its debt balance sheet of approximately R200 billion, while recently informing the Standing Committee on Public Accounts that it was carrying a total debt burden of near R400 billion, which could not be serviced due to its current cash flow and liquidity problems. It was also facing outstanding municipal debt of around R40 billion.

According to recent reports, Eskom expects to receive tranches of R20 billion of taxpayers’ money over the next few years to deal with its debt servicing commitments to the dismay of taxpayers who are already paying for a service they are not fully receiving due to recently escalating rolling blackouts.

Jeff Schultz, senior economist at BNP Paribas South Africa, says he expects the MTBPS to look meaningfully better as National Treasury updates its very prudent February national budget assumptions. However, revenue conservatism should remain, as increased global and domestic growth headwinds are likely to start tempering still resilient tax buoyancy.

He also expects spending slippage on public wages, state-owned companies and disaster relief and some clarity on government’s plans to deal with a portion of Eskom’s debt burden, although he only expects a final decision in February 2023.

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MTBPS to steer clear of social spending slippage

While he believes that National Treasury will likely stick to its guns to steer clear of significant social spending slippage, he thinks the ultimate decision will come down to politics at the ANC’s mid-December policy and elective conference.

“Additional funding through FRN issuance, coupled with a healthy build-up of cash balances, means that we continue to expect a reduction in government bond issuance, supporting a flatter curve. Our long-held view that the National Treasury’s 2022 national budget revenue assumptions were too conservative is likely to be vindicated in its MTBPS.”

Schultz says stronger for longer commodity prices, higher nominal GDP, helped by faster inflation and still resilient tax revenue buoyancy in corporate and personal income tax lend themselves to an improved consolidation trajectory. “We see more than R100 billion 1.5% of GDP, in revenue upside potential for the 22/23 financial year compared to the assumptions of National Treasury in February.“

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This is where spending slippage will happen

However, it is not all plain sailing. “We expect some spending slippage due to rising debt service costs, Treasury’s higher wage offer given cost-of-living adjustments and some additional fiscal support for smaller state-owned entities and disaster relief funds.”

However, Schultz says they expect the general narrative of the MTBPS to remain one of prudent caution, treading carefully amid an increasingly uncertain environment. He also expects that the focus will remain on spending, reflecting warranted remaining concerns over long-term debt stability.

“With state compensation budgets eating up 40% of non-interest spending and 42% of estimated revenues in the current financial year, Treasury’s position on its latest wage offer to public servants will be important. Its budget pencilled in a 2.6% nominal wage increase in February, of which 1.5 percentage points is pay progression and the remainder a budgeted extension of the R1000/mo nonpensionable cash gratuity.”

Schultz says he always perceived Treasury’s budgeted wage assumptions as optimistic, not just for the current financial year, but also for the medium term. “We think nominal increases of 3.0-4.5% in outer years is more realistic, as this would still keep compensation budgets rising below inflation.”

The MTBPS is not a policy document and therefore it is not a forum for sweeping changes to the social grants framework, but Schultz says hints are possible for what to expect on more permanent social support measures in the February 2023 budget.