SA’s minister of finance Nhlanhla Nene faces an almost impossible balancing act in his medium-term budget policy statement (MTBPS) on Wednesday, with Barclays Africa noting that he would “really have to deliver some fiscal magic to secure the market’s full confidence”.
In a pre-MTBPS note, Peter Worthington, principal and senior economist at Barclays Africa, said South Africa was arguably at one of its most difficult fiscal junctures.
He said: “National Treasury confronts a difficult challenge of providing continued fiscal consolidation and debt stabilisation despite slowing domestic and global growth, downward pressure on revenues and an expensive public-sector wage deal, as well as other upside risks to spending in the form of potential fiscal needs of state-owned enterprises and South Africa’s controversial rush into an expensive nuclear power procurement.”
Set all of this against the backdrop of upcoming local government elections, in which the ruling ANC faces its toughest challenge for voter support in key metropolitan areas, and you have what Worthington describes as a Gordian Knot of difficulties. An interesting metaphor because the only way forward when a knot is impossible to disentangle is to cut it. To decide how and where is perhaps where the “fiscal magic” is required.
Another interesting choice of metaphor applied to the medium-term budget comes in a statement from Nomura, who expect a vision of a swan, with serene calm on the surface, but furious paddling below.
The Japanese investment bank said: “Treasury will likely fight to meet the high-water mark of credibility achieved with the first Nene budget in February while trying to balance weaker growth with a lack of fiscal space for a big additional dose of countercyclical fiscal policy.”
Nene is widely expected to revise the government’s growth targets down.
When the Budget was tabled in February, Treasury assumed 2 percent real GDP growth for the year, but things have not panned out as expected, and a wide range of organisations – including the South African Reserve Bank, the International Monetary Fund and the World Bank – have downgraded their projections.
Barclays now expects real GDP growth in the current fiscal year to come in at 1.2 percent and GDP deflator inflation to come in at 5.1 percent, and expects Nene to unveil downward revisions of a similar magnitude, implying nominal GDP about 1.5 percent less than assumed.
On the expenditure side of the budget, there is plenty of upward pressure, including a public-sector pay deal worth R13bln more than what was budgeted in the current fiscal year alone, contentious and potentially costly nuclear power procurement plans, and the fiscal needs of financially embattled state-owned enterprises such as Eskom and SAA.
Barclays projects a revenue shortfall of about R14.5bln, driven mainly by corporate tax receipts, causing the main budget deficit to miss its target by 0.4 percent of GDP. The bank added that the cancellation of the holiday on Unemployment Insurance Fund contributions, which was pencilled in to the 2015-16 Budget, would allow the Treasury, however, to claim it had hit its consolidated deficit target.
Of as much interest will be changes to future years’ growth targets, not least because realistic forecasts are likely to keep ratings agencies and the market onside. In the 2014/15 Budget Treasury pencilled in 2.6 percent growth in 2016/17 and 3 percent for the following year, but low commodity prices, subdued global demand, and continuing electricity shortages, all point to lower growth outcomes.
The South African Reserve Bank’s recent MPC (Monetary Policy Committee) documents noted that it estimated South Africa’s potential growth rate was currently below 2 percent. Barclays added that this was likely to start improving only from 2017 onwards when the electricity constraints started to ease.
Analysts will also be watching the projected debt trajectory, which could test Treasury’s commitment to fiscal consolidation. Treasury has been saying for some time now that the debt/GDP ratio will peak in 2017/18. In this year’s Budget, government debt was projected to begin flattening in 2015/16 at 47.3 percent of GDP, hitting 47.6 percent of GDP in 2017/18. But, Worthington added, as long as growth persistently disappoints the budget assumption, the promised peak in the debt-to-GDP ratio plateau is unlikely to materialise, absent a much stronger drive to narrow the deficit.
One rabbit that Nene might possibly pull out of his hat on Wednesday is a new tax amnesty, in line with the Davis Tax Committee’s view that a significant amount of flight capital could be brought into the tax net.
All eyes will be on Nene on Wednesday as he faces up to his extremely difficult fiscal balancing act. Ratings agencies and investors will be watching keenly and hoping he will be able to conjure up some fiscal magic to lift the pervading sense of pessimism about the country’s prospects. – ANA