New Finance Minister had an unenviable task in delivering the MTBPS

25 October 2018

A downgraded economic growth outlook would always mean that revenue estimates would be reduced. Keeping expenditure ceilings intact (notwithstanding some reprioritisation) naturally translates to higher deficit and borrowing expectations. Higher debt levels and higher servicing costs are certainly not bond friendly and credit rating downgrades remain a risk.

We anticipated deterioration but perhaps not to the extent outlined in the Medium-Term Budget Policy Statement (MTBPS). Payment of overdue value-added tax (VAT) refunds was somewhat higher than anticipated, contributing to the higher deficit. Treasury expects the deficit to widen to 4.2% in 2019/2020 and return to 4% by 2021/22. The previous Treasury projection was a narrowing to 3.5% over the medium term. This is a meaningful deterioration. 

The market has reacted by pushing bond yields higher and the currency weaker. The reaction in the equity market is somewhat more mixed as wider deficits translates into looser fiscal policy, which can be equity market friendly depending on where the money is spent.

Overall, this is a reality check. To break out of this lose-lose cycle we need reforms aimed at improving productivity. On the plus side, Finance Minister Mr Tito Mboweni is keenly aware of the challenges and has himself highlighted the need for change.  As per his comments below. 

“Government needs to take some difficult decisions to get the economy on a higher growth path and to encourage job creation. Over the medium term, the President’s plan to support economic recovery provides essential elements needed to bolster confidence. A crucial component of this package is our intention to partner with the private sector to increase investment in public infrastructure. We are establishing an infrastructure fund that provides a clear signal to investors, draws on technical expertise, and supports improved project assessment, planning and implementation. Over the longer term, we require reforms to change the structure of our economy, raise productivity, increase competition and reduce the cost of doing business. We also need to find a way to sustainably manage government’s wage bill, which consumes about 35% of public resources.”

Evidence of follow through on the above is sorely needed to improve consumer and business confidence. This is crucial to private sector investment which is the lifeblood of the South African economy.