Budget 2021: Revenue and issuance optimism clouded by sustainability concerns

By RMB Global Markets Research

Finance Minister, Tito Mboweni will deliver the Budget Speech tomorrow

The better-than-expected performance in YTD tax collection suggests that revenue could be about R100bn higher in FY20/21 relative to the NT’s MTBPS estimate. This improvement bodes well for the revenue outlook over the MTEF.

On expenditure, we expect spending on compensation of employees for FY20/21 to be in line with the MTBPS estimates given the December 2020 Labour Appeal Court ruling in favour of the government. We anticipate expenditure slippage of R14bn from higher debt-service costs and additional SOE funding. Over the remainder of the MTEF, we do not believe that the NT will be able to deliver on a wage freeze, and that non-interest expenditure will be R74.2bn higher over 2021/22 to 2023/24 relative to the MTBPS.

Our revenue and expenditure outlooks, taken together, result in narrower budget deficits of 12.9% and 9.6% for FY20/21 and FY21/22 but wider deficits of 9.3% and 8.7% in FY22/23 and FY23/24 compared to the MTBPS estimates (FY20/21: 14.6%; FY21/22: 10.1%; FY22/23: 8.6%; FY23/24: 7.3%).

However, we think that the upcoming budget is likely to retain the wage freeze, as negotiations for the next 3-yr wage deal are yet to begin. If the NT was to also keep its MTBPS buoyancy assumptions unchanged, then the main budget deficit would narrow to about 6.2% in FY23/24 – better than the MTBPS estimate of 7.3%. We think that this would be met with a great deal of scepticism due to high execution risks on the wage-freeze assumptions and uncertainty around the growth and revenue outlook.

While the deficit is better than budget in the first two years, our debt-to-GDP forecast is quite a lot worse than budget, at 83.8% in 2020/21, 90.0% in 2021/22, 96.5% in 2022/23 and 100.1% in 2023/24, versus 81.8%, 85.6%, 90.1% and 92.9% in the MTBPS. The proportionally larger debt stock is due to prefunding this fiscal year. In addition, the discount rate at which SA is issuing domestic debt has averaged 0.90 YTD, and we have used this discount rate over the MTEF.

We estimate that NT will end the current fiscal year with R143bn in additional cash reserves due to R67bn in cash raised from pre-funding and a R76bn lower deficit.

Looking ahead, if local currency debt continues to be issued at the current weekly rate of R12.4bn, we estimate that NT will run ahead of budget by R110bn in 2021/22. Using these estimates, it would be possible for NT to reduce weekly issuance by R2.85bn per week in 2021/22, from R12.4bn to R9.5bn. This excludes drawing down on the R143bn of cash reserves raised in 2020/21. In 2022/23, we expect that issuance could be reduced by a further R0.5bn, from R9.5bn to R9.0bn – this assumes that NT’s monthly switch auction programme, which aims to switch as much as R5bn of R2023s per month, continues until the 2023s reach maturity, and that the switch auction is successful 80% of the time.

Issues of debt sustainability loom large despite the improvement in the fiscal outlook. This is because the primary balance is projected to remain in deficit, while the yield on government debt is expected to remain above the nominal GDP growth rate.

Due to the extent of lingering uncertainty around whether issuance will be cut, we expect that once NT actually announces a reduction in weekly issuance, bonds will rally as supply versus demand dynamics improve and NT’s consolidation intentions are rendered more credible.

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