Finance Minister Pravin Gordhan has promised to take the necessary steps to avoid a credit rating downgrade when he tables the 2016/17 Budget on Wednesday. Enormous damage was caused by December’s “Nene-Gate” and the threat of a rating downgrade to junk status – notably from Fitch and S&P – is looming.
| “We think this Budget should be judged through a ratings and therefore long-run growth lens to see whether real reform is forthcoming,” says Peter Attard Montalto, Senior Emerging Markets Economist and Strategist, Nomura International.“Our broad view is that fiscal conservatism will be delivered on, but with so little fat left on the bone to be cut in future years that this will be the end of the road. However, the market may well view this kind of budget as a positive, meeting expectations on fiscal policy and possibly ignoring any missed expectations on growth-related policies.
“In other words, spin may win the day at least in the short run, though we think rating agency commentary after the event will be particularly important for the market.” |
Expectations of softer global economic activity and broad-based downward revisions to South Africa’s growth outlook (by the Reserve Bank and IMF among others) will cause the Treasury to lower its own GDP expectations, says Annabel Bishop, Investec Bank Limited’s Chief Economist in South Africa.
“In the MTBPS, the Treasury projected growth of 1.7% for 2016 and 2.5% for 2017. Treasury is now likely to adjust their forecasts lower, towards the 1.0% mark in 2016 and 1.5% mark in 2017, closer to those of the IMF and World Bank.”
In this Budget, Treasury will have to show constraint when it comes to spending.
| “We think the main strategy for cuts will be a continuation of the tactics we described last year, whereby many small cuts will be made deep within departmental budgets,” says Attard Montalto.“Some headlines however may include an increased focus on procurement efficiency and things such as travel and conference expenses. However, these areas have already been cut substantially, such that we see little additional scope for meaningful cuts and instead it will be used for optics.
“We do not see it being politically possible in this current political climate, and in an election year to alter a multi-year wage agreement and reduce public sector wage growth that has already been promised. Nor do we think meaningful personnel reductions are possible after the previously announced removal of vacancies etc. “We do not think a cut to public sector works programmes is possible (it is a very politically sensitive topic – and a programme which is basically a form of unemployment insurance). This currently will make up around ZAR12.5bn of spending in the coming fiscal year. However, some savings in terms of slowing its future growth in outer fiscal years might be possible to save ZAR1-2bn.” He adds that a lot of cuts may be buried in unspecified austerity, pushed down into the provinces and local government that have expenditure of respectively around ZAR503bn and ZAR106.9bn projected at the MTBPS for the coming fiscal year. “That is they make up over half of all expenditure, albeit partly allocated through departments. We think the provinces will be allowed to have a greater say, and take the political can for austerity decisions. “Overall, we look for around ZAR30bn, ZAR40bn and ZAR75bn of expenditure cuts beneath the surface in the coming fiscal years from 2016/17, respectively, once other possible revenue and expenditure increase items are accounted for. This would represent 0.7% of GDP in the coming fiscal year.” Nedbank economists say the revenue for the next three years will be determined by Treasury’s projections on economic growth and inflation, as well as changes to tax policy based on the recommendations of the Davis Tax Commission. “In the State of the Nation Address, the president suggested that government will step up the scale of non-strategic state-owned enterprises, which could also boost revenue over the next three years. However, it is not at all clear that there is appetite for these entities in the private sector,” they add.
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