/ 23 October 2018

Despite Twitter appeal, Mboweni has little wiggle room in medium term budget

Nevertheless Mboweni is expected to put flesh on the bones of president Cyril Ramaphosa’s recently announced R50-billion stimulus package and R400-billion infrastructure fund.
Nevertheless Mboweni is expected to put flesh on the bones of president Cyril Ramaphosa’s recently announced R50-billion stimulus package and R400-billion infrastructure fund. (David Harrison/M&G)

New finance minister Tito Mboweni is set to deliver what is likely to be a difficult medium term budget policy statement (MTBPS) on Wednesday according to analysts.

But this did not stop Mboweni, who is vocal on social media, taking to Twitter to ask the public what changes they would announce if they held his position for the day.

His ability to respond to any of the suggestions however – which included cutting perks to government officials, cutting petrol prices, linking the receipt of social grants to training programmes, and freezing wage increases for public servants – appears unlikely.

Much of the MTBPS was finalised before Mboweni’s appointment was announced following the resignation of his predecessor Nhlanhla Nene. And as analysts have pointed, after very disappointing economic growth this year, and with very little financial room to manoeuvre, Mboweni is likely to toe a tough fiscal line.

“…Tito Mboweni, has not had sufficient time to stamp his mark on fiscal policy and, anyway, the National Treasury has very little room to maneuver against a backdrop of weak growth and political constraints on necessary fiscal and structural reforms,” said Absa senior economist, Peter Worthington in a note.

The MTBPS provides an update to the forecasts made by the national treasury in the main February budget. In particular, to figures such as the treasury’s estimates of GDP growth and revenue collection expectations, as well as adjustments to the budgets of various departments. Major announcements such as tax changes are not typically made in the October budget.

Nevertheless Mboweni is expected to put flesh on the bones of president Cyril Ramaphosa’s recently announced R50-billion stimulus package and R400-billion infrastructure fund.

READ IN FULL: President Ramaphosa’s announcement of the economic stimulus package

The stimulus package, as previously indicated by Nene, will largely be funded through re-prioritisation of money from underperforming programmes towards those geared at things geared towards job creation in areas such as agriculture and the township economy.

It will be hard to tell however, if the measures outlined by Ramaphosa will provide enough of a stimulus to growth in the near-term, said Worthington. The answer will partly depend on how business responds to these initiatives, once it sees more of the details in the MTBPS, said Worthington.

Since the February budget, when the country still basked in the relief of Ramaphosa’s rise to the presidency, economic conditions have deteriorated markedly – not least of which is the slump into a technical recession.

In February the treasury forecast real GDP growth to reach 1.5% in 2018, 1.8% in 2019 and 2.1% in 2020. These numbers now appear too optimistic.

The markets and ratings agencies will also be watching the expectations for the budget deficit and government debt levels. In February the treasury predicted a deficit of -3.8% of GDP in 2018/19 settling to -3.7% in 2020/21.

But in a note chief economist at FNB Mamello Matikinca, and her team, said they expected the deficit to widen to 4.1% of GDP for 2018/19, before moderating to 3.9% in the outer years. Government debt levels are likely to be revised marginally higher she said, to a rate of around 50.9% debt-to-GDP, compared to the estimated 50.3%.

Another critical factor will be expectations for revenues.

So far this year tax collections have proved fairly robust despite the slow economy, noted Matikinca. Both VAT and personal income tax were slightly ahead of collection targets until the month of August. Company income tax however was not performing as well, suggesting “both tax avoidance and company margin pressure” she said.

“We remain concerned about revenue projections in the outer years of the [medium term expenditure framework] given what we believe are overly optimistic economic growth and tax buoyancy assumptions,” she continued.

“It is likely that a turnaround in revenue collection capabilities at [the South African Revenue Service] will offset some of this weakness, but persistently low domestic growth and slowing international growth on the back of rising trade tensions are likely to place downward pressure on revenue forecasts.”

The ability of government to control its spending is another focus point.

In February spending cuts of around R85-billion were announced, in part to find sufficient funds to pay for fee-free higher education.

But several risks threaten government’s spending profile, said Matikinca. These include the public sector wage bill following the settlement reached with unions, which is expected to breach February’s expectations for wages by R30-billion in the coming three years.

Mboweni has been critical of government’s salary bill in the past and he reportedly said in an address over the weekend that R8 out of every R10 (or 80%) of the budget was spent on wages. The figure given in February puts it at 35% of all government spending. Either way, Mboweni’s critical stance on the issue, has put him squarely in the sites of labour.

Trade union federation Cosatu has said the claim is “bizarre”, and called on Mboweni to reverse “dominant neo-liberal and anti-state thinking”. Despite concerns that the wage bill is out of control Ramaphosa recently committed to ensuring that there were no retrenchments in the state, amid the recession.

How Mboweni squares away the conflicting aims of reigning in salaries, with preventing job losses, remains to be seen.

The deterioration of the financial health of certain state owned entities, and the extent to which government may be forced to lend them support will also be carefully watched.

Ailing South African Airways for instance has indicated it will need R22-billion to turn itself around noted Peter Attard Montalto, head of capital markets research at Intellidex.

“There is simply no room in the MTBPS framework to provide this with no other domestic sources available, including the fact that banks are happy to roll debt until after the election but will not increase their exposure,” he said.

Similarly Mboweni will have to contend with the needs of the likes of Denel and the SABC, both of effectively insolvent, he added.

Finally Mboweni has hinted that government will make some announcements on VBS Mutual Bank — which collapsed under the weight of alleged fraud and corruption earlier this year and had to be placed under curatorship in April. The state has agreed to provide a guarantee for small depositors at the bank, up to R100 000.