Privacy Policy
We use cookies to give you the best experience of our site. Please read our full privacy policy. close

Legal Disclaimer

This website specifically caters for fiduciaries, financial intermediaries or people working in institutional financial services industry.

By accepting the terms and conditions you confirm that you are a fiduciary, financial intermediary or work in the financial services or investments industry and require information regarding industry, economic or legislative updates, or information on Sanlam Investment’s products and solutions.

This website provides information on Sanlam Investments’ products, the markets and our services in general. This website is not intended for retail investors and we recommend that you seek financial advice from a financial advisor to conduct a proper financial needs analysis to ensure that our funds are suitable for your investment risk profile, financial needs and goals.

You may not reproduce, modify or create derivative works from, publish, distribute, transmit, display, license or transfer any of the content contained on this website, unless you have obtained our prior written authorisation. The website and all its content (text, graphics, icons, hyperlinks, private information and designs) are owned by or licensed to Sanlam. As such the intellectual property rights in the content on this site are protected against infringement by local and international legislation and treaties, and may not be used in any way without our or the licensor’s consent.


I ACCEPT I DO NOT ACCEPT

Market Forces

Medium Term Budget backs Ramaphosa’s stimulus plan

Article Image
home »

Medium Term Budget backs Ramaphosa’s stimulus plan

Article Image
home »

Medium Term Budget backs Ramaphosa’s stimulus plan

25-10-2018

Article Image

Medium Term Budget backs Ramaphosa’s stimulus plan

Government’s 2018 Medium Term Budget Policy Statement (MTBPS) provides clear links between the medium-term expenditure statement on the one hand and, on the other hand, President Ramaphosa’s five growth enhancing measures, namely:

  • Growth-enhancing economic reforms
  • reprioritisation of expenditure
  • establishment of an infrastructure fund
  • addressing pressing problems in education and health
  • promoting investment in municipal infrastructure

Spending to be done wisely

Importantly, government’s intention to get things going has not led to a boost in the overall level of spending (although we should be cutting spending). Rather, the National Treasury has stuck closely to its expenditure ceiling despite the increased wage bill and additional payments to state-owned enterprises. It is also clear Minister Mboweni intends to promote accountability and good governance, while spending available resources more wisely and efficiently. To back this up the Statement emphasised the need to bolster capital expenditure, while curbing consumption. Total public sector infrastructure spending over the new medium-term expenditure period up to 2021/22 amounts to R855 billion – similar to the R834 billion announced in February 2018 for the three years up to 2020/21. So, no major increase there. However, encouragingly, the Minister provided a list of examples of targeted projects already under way, which support the five growth enhancing reforms.

Intention still to stabilise debt ratio

As regards the debt trajectory, the intent of the National Treasury is clear. It wants to stabilise the debt ratio and eventually reduce it. And, apart from the need to lift economic growth, it has identified the government’s wage bill, which accounts for 35% of consolidated spending, as one of the major obstacles to achieving this. The Minister stressed that the R30.2 billion shortfall in the national and provincial departments’ wage bill, related to the recently concluded wage agreement, must be absorbed within the current budget. That will prove difficult. It seems to imply reducing employment.

Maintain institutional strength

The 2018 MTBPS hit some of right notes in emphasizing the importance of using scarce resources productively, stamping out graft, improving the operational efficiency of state owned companies and maintaining institutional strength. On the latter, the Minister gave a nod in support of the Reserve Bank’s pursuit of a suitably low and stable inflation rate. This is especially important at this time, given the tightening of global financial conditions and the concomitant volatility of the Rand.

Revenue, the thorn in Treasury’s side

But, there is a problem, namely revenue. There is a larger than expected revenue shortfall in 2018/19 due to the repayment of overdue VAT receipts (although addressing this issue is a positive step) and disappointing growth in company tax receipts. Accordingly, a wider budget deficit is projected for the next three years. Specifically, a Main Budget deficit of 4.3% of GDP is expected for 2018/19 (0.5% of GDP higher than previously expected), which increases to 4.4% of GDP in 2019/20, before easing just a bit to 4.2% of GDP in 2021/22. We need to do better than that. More importantly, the primary budget balance (revenue less non-interest spending) remains negative over the next three years, decreasing from -0.7% of GDP in 2018/19 to -0.2% of GDP in 2021/22. At some point, in the absence of stronger real GDP growth or lower real interest rates, the primary deficit must switch to a meaningful surplus in order to stabilise the debt ratio. As it stands the government debt ratio climbs to 59.6% of GDP by 2023/24.

Ratings risk is back

Overall, years of fiscal revenue underperformance and excessive expenditure linger in the fiscal numbers and risk remains elevated. It’s no easy task to stabilise the debt ratio in the absence of a decline in expenditure relative to GDP. In turn, cutting spending is no easy matter considering South Africa’s high unemployment rate. Also, there are latent risks in non-financial public enterprises and corporations. The state’s balance sheet remains under strain. And without a marked improvement in the primary budget balance, the fiscal maths is not adding up to a stable debt ratio as yet. That implies the risk related to sovereign debt ratings is back.

 

LISTEN:

Print Friendly

Leave a Reply

Your email address will not be published. Required fields are marked *

intelligence logo

2016 Award

Connect With Us

Twitter LinkedIn Soundcloud Soundcloud

Leave a Reply

Your email address will not be published. Required fields are marked *

Read This Next
rands-dollar
White Paper: Estimating future foreign asset returns in Rands via convolutions

Executive Summary Recent changes to Regulation 28 have had definite impacts on the investment landscape, with investors (both institutional and...
Read More

X