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The budget unveiled on 22 February 2023 by Finance Minister Enoch Godongwana was a mixed bag for markets and investors.
Finance Minister Enoch Godongwana delivered his second national budget speech on Wednesday afternoon, saying that the National Treasury has a fiscal strategy to balance national spending priorities and an expanding social wage bill with constrained growth and energy generation capacity.
The real test will be its implementation, and the ability of the Treasury to stick to its targets to cut the budget deficit and prevent the overall level of debt from becoming unsustainable.
A balancing act
Initial indicators at least were favourable, with the rand putting in some mild gains and government bond yields coming down a few basis points. This knee-jerk market reaction, with rallies in the rand and domestic bond and equities, suggest that the plan seems credible, while the country’s annual budget deficit is projected at 3.2% in 2025/26, falling from 4.2% currently.
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But the balancing act will be arduous, to say the least. Taking on R254-billion worth of state-run power utility Eskom’s debt means the overall debt to gross domestic product (GDP) burden is now expected to peak at 73.6% in 2025/26 from just over 71% previously in 2022/23. But it will help make Eskom more viable.
Growth and your global portfolio
A lot will hinge on the government’s forecasts for GDP growth. The fact that it frequently overestimates the economy’s growth trajectory is sobering when one considers that its projection is for GDP to expand by an average of 1.4% from 2023 to 2035 compared to 1.6% previously. This is not the kind of growth that can lend strong support to a currency over the medium term, and failure to even achieve such modest levels would increase the debt/GDP ratio.
This in turn will have implications for local investors with assets abroad. If the rand was to weaken further as the domestic low-growth scenario sinks in, it would make dollar or euro-based assets worth more in rand. But it would also make building up such portfolios more expensive as your rand would not go as far overseas.
But the budget, even in the longer run, is not necessarily negative for the rand, provided the targets remain broadly on track.
Credit ratings outlook
“The key credit rating agencies (Fitch, Moodys and S&P) already rate South Africa’s debt as including all Eskom and other SOE (state-owned enterprise) debt which government holds guarantees over, and so the impact should be credit neutral,” said Annabel Bishop, chief economist at Investec, in a budget commentary.
If the rating agencies do not downgrade South Africa’s credit ratings further – they are deeply in “junk status” currently – as a result of this budget, that would provide the rand with at least some support. Changing outlooks to stable or positive, which signals that a rating is likely to remain the same or may be raised, would be highly supportive. Currently, three of South Africa’s ratings outlook are negative, with only Fitch’s being stable.
A ray of hope with solar
Incentives for solar power announced in the budget are also largely positive for the rand in the longer run.
“From 1 March 2023, businesses will be able to reduce their taxable income by 125 per cent of the cost of an investment in renewables,” the minister said. For individuals who install rooftop solar panels, there will be a rebate of 25% for the panel costs of up to R15 000.
This is a big deal. Accounting firm PwC estimates that in 2022, solar panels provided an additional 2 000 MW of generating capacity, which equals two stages of the dreaded loadshedding that Eskom has to implement to prevent a grid collapse. And the estimates of the impact of rolling blackouts on GDP growth range from two percentage points to five percentage points.
Triggering a surge in solar through incentives will almost certainly reduce loadshedding and by extension add to economic growth. And the industry alone as a growth sector will make a positive contribution to GDP. It all helps to make the Treasury’s current budget projections for GDP growth more feasible.
South Africa’s economy also needs to decarbonise to remain competitive. Punitive measures are looming in key markets such as Europe for imports from companies or sectors with a heavy carbon footprint.
So solar power has the potential to energise the rand in the longer run.
No matter where the sun rises over your asset base, this budget has implications for your stock of wealth.
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