Expect much ado about nothing when South Africa unveils its national budget next week. Reading between the lines of a note to investors, that’s what leading South Africa analyst Peter Attard Montalto thinks is likely. Although Montalto is based in London, he has his finger on the country’s pulse, consistently accurately setting out how events are likely to unfold. Montalto expects lots of noise about relatively small announcements; any significant political controversies are likely to be rhetoric with little follow-up. If Montalto proves right, investors will be delighted. President Jacob Zuma’s State of the Nation Address (SONA) caused an uproar as he signalled that radical economic transformation was on the table. Senior business players like retail billionaire Christo Wiese are among the leading figures to raise their serious concerns that many of the ideas contained in SONA will be very bad for economic growth. With high unemployment and, together with that, rampant poverty among the voting masses, the South African government is likely to favour taking from the rich as a quick and easy point scorer. Montalto thinks the next budget will be configured in such a way that it provides South Africa with another stay of execution among global ratings agencies itching to downgrade the country. – Jackie Cameron
President Jacob Zuma’s State of the Nation Address (SONA) stirred up controversy through talk of radical economic transformation in a move evidently designed to drum up political support. However, investors can expect the next important speech, the national Budget, to be fairly pedestrian once you drill into the details.
That’s the message from London-based South Africa analyst Peter Attard Montalto of Nomura, who said in a note to clients that he expects the Budget “to add up to stabilising debt to GDP”.
“The appropriate volume of revenue increases pencilled in will be provided scatter-gun style – however, the fundamental issue will be the medium-run forecast for per capita income growth, where we expect there to still be too much optimism,” he predicted.
There is widespread speculation in South Africa that Zuma is intent on wrestling the keys of the National Treasury away from the finance minister. This is less of a concern among global investors, it seems.
“We expect the Budget to do the minimum amount necessary vs the ratings constraints again, and while we expect the National Treasury to be more constrained in wider policy areas than in the past year, we still see it retaining full control of the fiscus,” said Montalto.
The annual Budget will be unveiled on Wednesday 22 February. The issue of ratings – Moody’s will be the first to publish its ratings update on 7 April, then S&P on 2 June – hangs over the event, noted Montalto.
It is evident that global investors have been paying close attention to moves to “hem” the National Treasury into a “core fiscal and budgetary role”.
“That has always included financial sector policy and regulations and this is the key area that may be in more open conflict with the broad shift in tone from the SONA (and subsequent ANC rally speech and New Age Breakfast speech from the President),” said Montalto.
“This is the first key area to watch in the Budget speech next week and we expect the National Treasury to plant a firm flag in favour of the existing financial sector policy framework with another rallying cry on issues such as the FICA (financial crimes) bill,” he noted.
The second key area will be on procurement budgets, which the State of the Nation Address attempted to shift to a more transformative role, is Montalto’s expectation.
“This has been a long-running issue between the National Treasury, the ANC and the rest of government. We think the National Treasury will firmly set out the legal and constitutional constraints on a more aggressive transformative procurement policy, highlighting where this does not work and is causing issues.”
With student protestors calling for free tuition disrupting university campuses and making the headlines in connection with violent rampages, tertiary education fees are on the radar. Montalto expects the National Treasury to highlight the risks of recommendations to come out of a commission on fees before there are significant changes to this spending.
“At this stage we think a coded political response to the SONA will be very much rhetoric only. We doubt there will be any shift in either direction on policy in these areas in the Budget.”
Montalto said that Nomura is not expecting surprises in allocations.
The macro backdrop
Drilling down into the numbers, Montalto pointed out that the National Treasury “has continuously flattened the growth forecast as we move through fiscal update events, but has always maintained the forecast such that positive per capita income growth has returned through the end of the forecast horizon”.
However, “there are severe medium-run constraints on labour, capital and productivity expansion that will cap growth at only small positive levels of per capita income growth (ie around 2% in the medium run for real growth)”.
The stronger rand “provides some additional breathing space”, said Montalto.
“A stronger ZAR helps lower debt service costs as well. Shifts in debt service costs are likely to be small because of a broadly unchanged T-bill rates (and curve) since the Medium Term Budget Policy Statement (and South African Reserve Bank rates unchanged), while the yield curve’s slight steepening will only have minimal impact via swap auction costs.”
Nomura does not expect major shifts in debt issuance numbers. It also believes a VAT increase will have been rejected as an option because it has too large a political and economic impact.
Among the decisions it expects next week:
- A fuel levy increase to “do the heavy lifting” and raise about R17bn in revenue;
- Bracket creep in personal taxes – below inflation increases in bracket levels sweeping more income into higher rates;
- The possibility of a new higher income tax bracket rate or possibly an increase in the current top rate of tax;
- Small changes to estate duties, capital gains taxes and sin taxes.
The risks are for a smaller rise in the fuel levy and a larger increase in other tax changes, said Montalto.
“Other than this, there will likely be much noise on small amounts of money being spent on particular initiatives, but as said above we expect no major shifts.”
“We do not expect emergency ratings action after the Budget (it would have to be a serious ‘miss’ for this to occur). But the first ratings action date is Moody’s on 7 April and we think a downgrade is possible, but may well give benefit of the doubt until its 11 August ratings update, when there may be more certainty on growth this year and Eskom risk especially.”
Nomura expects S&P to downgrade the local rating this year, bringing the external and local ratings in line, possibly at its next 2 June update given declining fiscal flexibility and possible shocks from Eskom.
“We expect no change in the SARB’s mandate,” added Montalto.