/ 18 February 2008

Power crisis likely to wipe out surplus

The goal posts for Finance Minister Trevor Manuel’s spending plans in Wednesday’s national budget were carefully placed last October when he revealed his medium-term expenditure framework (MTEF).

However, the posts may have been shifted by the policy decisions taken at the African National Congress’s national conference in Polokwane — and certainly started a merry progression when President Thabo Mbeki delivered his State of the Nation address in Parliament two weeks ago.

In addition, the dramatic change in economic outlook caused by the electricity crisis has set the posts whirling.

The MTEF set spending for 2008/09 at R618,5-billion and foresaw another little budget surplus of R22,6-billion, or about 1% of GDP.

Razia Khan, regional head of research at Standard Chartered Bank, reckons that given the centrality of the energy crisis, measures to mitigate the effect on growth as well as support for Eskom will be a key focus for the budget. Mbeki’s State of the Nation address hinted at state provision of support for Eskom, which faces at least a R300-billion capex spend over the coming years.

The budget is likely to provide detail on how this will be done, Khan said, but noted that there will be potentially important fiscal implications.

“There is the size of any support package,” he said. “In order to be meaningful, it would likely have to exceed [MTEF] projections for the fiscal surplus in FY 2008/09, or 0,7% of GDP.”

One way of dealing with the problem would involve a direct cash injection into Eskom, but this would risk eroding the entire planned budget surplus (and then some) all on its own.

A second alternative would be to guarantee a portion of Eskom’s debt, which would have the advantage of not requiring the authorities to put up any cash upfront. “This would help to safeguard the fiscal balance,” Khan said, “but it might also have longer-term implications, if somewhat indirect, for South Africa’s own credit rating.”

Something may have to give in the short term, he said, and it is likely that the near-term desire for a fiscal surplus may have to give way to a more realistic assessment of the economy’s immediate needs.

Polokwane effect

Johan Botha and Shireen Darmalingam from Standard Bank group’s economic department tend to discount the Polokwane effect on the Budget, however. They said that the State of the Nation address made no particular mention of the possible effects of political and other events post-Polokwane.

“This is because it is believed that these events will have little impact on the budget and the budget process itself,” they said.

“In other words, changes in direction and policies, if any, will follow the budgetary process rather than the other way around. Of course, there may be initial wish lists, but they normally tend to be vague and un-costed, and thus difficult to entertain and implement seriously. A single step from wish lists to policy implementation is one step too far.”

The Standard Bank pair also said that Jacob Zuma, the new ANC leader, stated on more than one occasion that no major changes in the country’s general policy framework were on the cards. He has also expressed satisfaction with the way in which the minister of finance is conducting fiscal affairs.

Also, Mbeki took stock of what still needs to be done in terms of his view of government plans, strategies and objectives and produced his list of 24 “apex priorities” in Parliament, but not all of them have budgetary implications or can immediately be executed, and some will require budgetary support over time.

Their conclusion is that this year’s budget is likely to be an island of calm in a turbulent domestic and international environment. “A solid if somewhat more conservative budget is anticipated, with further emphasis on economic growth, infrastructure development and social spending.”

Social spending

Khan also suggested that, as hinted at in the State of the Nation address, social expenditure is likely to be a big theme of the 2008 budget. But because of the spending needed to address the power crisis, the availability of additional budgetary resources to meet other needs may be somewhat constrained.

Nonetheless, South Africans are at least likely to see an increase in the recipients of social grants, alongside a decline in the pensionable age for men to 60 years. With social grants currently accounting for 3,4% of GDP, there is room for South Africa to increase spending on welfare over the medium term.

Nedbank’s economic research group, Dennis Dykes, Nicky Weimar and Carmen Altenkirch, suggested that social services, which include spending on housing, education and health, should receive an additional R9-billion in order to help improve the quality of public services in rural areas.

They also reckon infrastructure spending on transport, communication, energy and water services will get at least an additional R4-billion over the next fiscal year. “Government acknowledges that improving the country’s infrastructure is vital to future growth prospects. The MTBPS [Medium-Term Budget Policy Statement] talks about extensive improvements to hospitals and schools over the next three years,” they said.

Under the MTEF, crime prevention and justice was due to receive an additional R2-billion but now, they said, this figure could be increased given the continued national debate.

More funds will also be made available to accommodate the higher-than-expected 2007 public-service salary agreement.

The Nedbank team said that the new industrial policy action plan is expected to benefit from R2,3-billion allocated for industrial policy initiatives and an additional R5-billion in tax incentives over the next three years.

Deloitte’s experts echoed this, reckoning that a new incentive for strategic industrial projects will be announced either in the budget or in March. Deloitte’s also noted that there is a task group looking at the industrial development zones, that the status of the motor-industry development policy will be maintained until 2012 when it will be replaced, and that incentives around alternative fuels are increasing. — I-Net Bridge

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