Political messaging, juggling spending demands, and the outlook for SA bonds

Jeff Schultz, senior economist at BNP Paribas South Africa, provides the following perspective on the Budget. He discusses:

  • What the ANC hopes the Budget will achieve politically.
  • The outlook for government revenue and spending.
  • Why BNP Paribas remains positive on government bonds.

Emulating the prudent approach to future revenue gains displayed in November’s Medium Term Budget Policy Statement (MTBPS), Finance Minister Enoch Godongwana’s maiden Budget stuck to the script, maintaining that “difficult and necessary trade-offs” are required to ensure long-term growth and fiscal sustainability.

National Treasury’s strategy in the Budget was twofold:

  • Choosing to understate the extent of revenue upside, to avoid growing political pressure to spend more.
  • Balancing spending needs to where fiscal multipliers for the economy are greatest, while at the same time emphasising that additional (permanent) social protection measures will require other financing mechanisms (taxes) to ensure they do not worsen the country’s fiscal position.

The politics: managing expectations

Little about the Budget was populist, even though voting trends indicate the ANC could lose a national majority in the 2024 election. Nevertheless, for now, the government seems committed to a strategy of raising growth and combating corruption as its cornerstone appeal to these future voters. There is time yet for populist spending. For now, though, there is little evidence of it − rather a push to double down on improving the glacial pace of economic reforms.

Government debt markets

The first and most important audience of the Budget are those who buy and sell government debt. We argue that this is essentially “a good” budget, given the limitations, and the minister went to some length to demonstrate probity and a clear understanding of the serious challenges facing the economy.

Sweet-talking labour

Godongwana made a point of highlighting the public sector wage bill as the key threat to expenditure restraint. In this light, the (unexpected) R50 billion (0.8% of GDP) additional allocations to education, health and police may be read, in part, as a bargaining tactic ahead of public sector wage negotiations, which are likely to be acrimonious and difficult.

ANC-aligned unions make up 40% of the total public sector corps. Winning them over with sector-specific wage hikes or headcount expansions could therefore increase the government’s chances of pushing through a favourable public sector wage agreement with the biggest unions.

Social security

In line with the president’s SONA announcement, the R350-a-month Social Relief of Distress grant was extended by another 12 months at a cost of R44bn (0.7% of GDP). It seems likely that a comprehensive permanent social security net (or something close to it) will be implemented in 2023’s Budget.

In addition, appropriations in the outer years are targeted at increasing the value of social grants (at a minimum, keeping up with inflation) and maintaining free basic services – something which is not yet fully budgeted for over the medium term. The ANC will be at pains to ensure minimum standards of living ahead of the 2024 general election.

SOEs … again

Not for the first time, the finance minister emphasised that SOEs would not receive budget support without a good business case for a bailout, and that the rationalisation of holdings was necessary. In the past, these promises have been politically difficult to keep.

However, we think that the particularly parsimonious approach to new appropriations in this Budget is indicative of strong political will to limit bailouts. The R3.5bn expected by Minister of Public Enterprises Pravin Gordhan as part of South African Airways rescue is notably absent from the Budget.

Eskom will continue to receive R23bn (0.4% of GDP) in state support over the medium term to help it service its debt. However, National Treasury indicated that a “sustainable solution” to Eskom’s burgeoning 5.5%-of-GDP debt burden still needs to be found, with more details to follow over the next financial year on how best and how “fairly and equitably” to deal with its unsustainable debt burden.

Revenue conservatism maintained

National Treasury now estimates a cumulative 3.4% of GDP improvement in revenues over the medium term compared to the MTBPS.

Even with more measured revenue assumptions, Treasury was able to present a faster fiscal consolidation trajectory than before, estimating the primary budget will return to balance a year earlier than previously thought.

Juggling spending demands

There was a strong focus on balancing competing spending demands with what we interpret as an acknowledgement by the new finance minister to avoid “austerity” budgeting and move towards fiscal multiplier enhancing spend.

Although Treasury revised up main budget non-interest spending by R190bn over the next three years, we are encouraged that most of this is targeted at “infrastructure catalytic projects” – in fact, real growth in spending on capital assets now outpaces debt service costs. This also meant higher provincial and local government allocations aimed at enhancing service delivery.

Although departmental budget allocations don’t keep up with inflation, we are encouraged by higher allocations to the justice ministry to fight corruption, while policing and healthcare personnel budgets were also raised, perhaps as a peace offering to angry unions before wage negotiations start in March.

On wages, though, there were upward revisions of about R18bn (+0.2%) a year because of administrative errors in calculating provincial pay progression and cash gratuity payments that have now been addressed – crucially, real compensation growth still falls by 1.3% a year over the medium term.

Outlook for government bonds is still positive

Lower borrowing requirements compared with the MTBPS’s expectation, alongside an earlier return to a primary budget in balance, bodes well for slowing the pace of South Africa’s debt accumulation.

That said, what looks be a decision to avoid cutting weekly bond issuance right now means that debt-servicing costs remain one of the fastest-growing components of the expenditure framework, rising by 10.7% a year and well in excess of our estimates for nominal GDP growth to average 6% in the medium term. As such, we still deem it unlikely that Treasury will be able to stabilise debt over the next five years, as it expects.

Medium-term debt stability less out of reach than before

That said, Treasury has clearly adopted a strategy in this Budget to focus on fiscal multiplier expenditure balanced by an earlier return to a primary surplus than before.

Our automatic debt dynamics approach to assessing the contributions of FX, real financing costs and real growth to stabilising debt means that long-term debt stability could prove possible in outer years of the budget framework for as long as long-term potential growth improves and Treasury adheres to its primary balance goals. Indeed, Godongwana continued to moot the swift implementation of structural economic reforms via the NT’s Operation Vulindlela unit, chaired by Deputy Finance Minister David Masondo.

No cuts to issuance likely for now

Treasury is guiding for a total domestic debt issuance of R330bn in the 2022/23 financial eyar. With R2023 bonds maturing, Treasury will probably buy back the remaining R80bn notional of R2023 bonds. This leaves about R250bn to R260bn net issuance (cash proceeds) and is in line with the current weekly size of tenders. Hence, the Budget does not signal an outright cut in weekly issuance. But, given the prudent nature of revenue and deficit estimates, Treasury will probably not need to use its cash balances.

No outright signal to cut issuance is probably a small negative for bonds − hence the initial reaction was a bear-steepening. However, strong fiscal performance, a benign inflation outlook and elevated asset swap spreads still fundamentally support SA government bonds, in our view.

Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.

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