Markets and investors are losing faith in the reform narrative and promises of President Cyril Ramaphosa’s government, whether justified or not. Having been largely disappointed by last week’s State of the Nation Address (SONA) by President Ramaphosa, they are pinning their hopes on Finance Minister Tito Mboweni’s Budget for something that will reignite the South African economy and investor confidence. In fact, while delivering his SONA Ramaphosa promised Mboweni would shed more light on a number of key issues.
Little to work with
Mboweni will deliver his Budget Speech and table the 2020 Budget in Parliament at 2pm on Wednesday. But don’t expect much, for despite having some great ideas, Mboweni has extremely little to work with. It may be a case of his magician’s skills being tested more than his financial ones this time.
Most analysts believe the rand will experience some hefty swings this week, triggered largely by the Budget but also prone to external developments. Over the past month alone the rand fell 4.6% as sentiment turned against emerging markets and the outbreak of the coronavirus in China triggered a stampede to safe havens. In total, the rand is down almost 7% for the year so far.
Moody’s and possible downgrade
Lurking in the wings alongside the impacts on the rand, are the effects of further rolling electricity blackouts – that have returned with a vengeance - and how government will deal with the further financing of Eskom during its restructuring. And watching all of this closely will be credit ratings agency Moody’s Investors Service who previously said it would wait for this Budget before deciding whether it will be the third and final agency to downgrade South Africa to sub-investment grade or ‘junk’ status.
How will government cut spending?
The markets – will want to see a Budget that provides a credible plan to give effect to government’s commitment to cut spending by R150bn over the next three years and deal with its highly negative and worsening debt profile. At the beginning of 2009 government debt stood at 29.8% of GDP; by September last year it stood at 61.5% according to the SA Reserve Bank.
Investors will also want to see clear signs in the Budget of structural reforms to bolster the economy, as well as workable plans for Eskom and other state-owned companies. All of this Ramaphosa and Mboweni will have to deliver even in the face of resistance from within their own party and from their allies COSATU and the SACP.
Disastrous effects of a downgrade
There are realistic fears that failure by Mboweni to give financial credence to a feasible government plan to move South Africa into better territory could lead to a major selloff. A downgrade by Moody’s that will bring South Africa fully to ‘junk’ status could trigger the ditching of South African bonds worth billions of rand – estimated by Reserve Bank deputy governor Kuben Naidoo to possibly affect bonds to the value of as much as R120 billion.
In addition, a Moody’s downgrade is likely to have other knock-on effects – a weakened rand, higher interest rates, and reducing government’s ability to spend on key services and programmes. That in turn will most likely create some rather serious social and political problems for Mr Ramaphosa’s government. Who said it wasn’t a cruel world out there?
Toughest Budget since 2008
This will arguably be the toughest Budget to produce since the global financial crisis of 2008, except this time the problem is an almost wholly homegrown one. Mr Mboweni will truly be scraping the bottom of the barrel to try and find the money he needs to deal with the country’s multiple challenges.
5 Key things to watch out for
Here are some key challenges and issues to watch out for in Wednesday’s Budget:
- Tax revenue collections are not meeting their targets, a picture that could worsen – so where will Mboweni find additional money?
- In his SONA President Ramaphosa promised that Mboweni would provide more details in his Budget on structural economic reforms, reducing the state wage bill, cutting expenditure, funding and turning around state-owned companies, reducing youth unemployment, and establishing a sovereign wealth fund and state bank – everyone is waiting with bated breath.
- To meet the target of cutting government spending by R150 billion over three years, most of it will arguably have to come from slashing the public sector wage bill, but government is still tied to a wage agreement with unions until March next year – will this commitment be put on hold until then, possibly triggering a Moody’s downgrade?
- With Mboweni desperately needing more money but having few to zero options, where will he look: increasing VAT and risking labour and social upheaval? A 1% increase is being touted. Or strike the wealthy with a wealth tax and trigger further capital flight? Or going beyond the current suggestion of dipping into public sector pension funds and hitting the entire pension fund industry – public and private - with a prescribed assets policy?
- There are a few other tax-increase options, among others raising personal income tax, especially at the higher income end; increasing corporate tax and making business investment in South Africa even more unattractive; increasing fuel tax at a time when petrol prices are already emptying the pockets of motorists and businesses; a once-off tax levy on personal income that no-one can afford; revisiting taxes such as estate or capital gains taxes; and hefty sin-tax increases placing smoking and drinking well beyond the budgets of most people. Only the last one is a certainty.
Apart from increased sin taxes, the only other certainties are that no-one wants to be in Mboweni’s shoes on Wednesday, while all of us will be likely to feel the pain in some or other way. We will have to wait until Wednesday to learn what exactly Mboweni has in store for us but there will undoubtedly be some bad news.
One certainty is that South African’s can no longer bury their heads in the sand and need a significant percentage of their liquid assets safely invested outside of our borders.
To find out more, contact Carrick at [email protected] to speak to a Wealth Specialist.