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Cape Town - Credit rating agencies and global financial markets will be scrutinising the Medium-Term Budget Policy Statement (MTBPS), also known as the mini budget, more closely than usual for signs of “fiscal slippage”, says Overberg Asset Management (OAM) in its weekly overview of the SA economic landscape.
"Unfortunately slowing GDP growth will put a strain on tax revenues," says OAM.
"At the same time increasing demand for financial assistance from state-owned enterprises (SOEs), in particular Eskom, plus higher than expected public sector wage costs raises the risk of expenditure over-runs," according to OAM.
Finance Minister Nhlanhla Nene is due to deliver his mini budget on Wednesday.
The full-year revenue shortfall could be as much as R15bn equivalent to 0.3% of GDP. Most of the shortfall will be due to lower corporate income tax receipts which tend to be more volatile than personal income tax receipts, said OAM.
The asset manager referred to the SA Reserve Bank, IMF and World Bank already having slashed their forecasts for SA GDP growth in the current fiscal year to substantially less than the 2% growth the Treasury assumed when it prepared its 2015/16 Budget. GDP growth of 1.3% - 1.5% is more likely.
OAM said on the expenditure side, this year’s public sector wage deal will add
R13bn more to the Treasury’s expenditure than it had provisioned for,
equivalent to around 0.3% of GDP. While easy to quantify the extra
commitments to SOEs may be less straight forward.
Eskom may
require emergency funding especially if the National Energy Regulator of
SA does not grant it high tariff increases. Other SOEs such as the Post
Office and South African Airways are also queuing up for funds.
OAM said the Treasury is committed to matching SOE funding through the sale of
state assets but this will be an arduous process fraught with political
obstacles. The controversial nuclear power procurement programme adds an
extra expenditure headache for the Treasury.
"While Finance
Minister Nene has called for cost transparency there is a risk that the
government will get its way in fast-tracking the nuclear energy project
and force the Treasury to abandon its fiscal prudence."
OAM also said there
is likely to be bad news regarding both the main budget deficit and
national debt-to-GDP ratio. The MTBPS should shed light on the expected
main budget deficit, which inevitably will rise from the originally
budgeted 4.1% of GDP, potentially to as high as 4.6% of GDP.
The
last Budget assured that the national debt-to-GDP ratio would flatten
out this year at less than 48% but given the shrinking denominator it
seems increasingly likely that the national debt ratio will breach the
50% level.
According to OAM Nene faces an unenviable task as
he tries to balance political spending pressure with the credit rating
agencies’ concerns over fiscal prudence. The likely casualties will be
the tax payers.
Although tax increases are traditionally implemented at the main Budget, OAM expects some guidance will be provided at the MTBPS.
South Africa economic review
• The coal strike ended after little more than a week after the National Union of Mineworkers (NUM) accepted the revised wage offer from coal mining companies.
Entry level employees will receive wage increases of between R750 and R1 000, equivalent to rises of 12.5% - 16% across the different coal producers while other employees will receive a 7.5% increase in year one. In year two all employees will receive an increase of 7.5%.
While higher than the inflation rate and likely to raise inflationary expectations, the relative speed of the resolution should limit the impact to coal producers and the broader economy.
• Foreign investors remained buyers of domestic bonds for a second straight week with net purchases of R2.4bn helping reverse the substantial -R9.3bn net selling during the month of September.
The inflow is attributed to greater risk tolerance following the release of “dovish” Federal Reserve policy minutes. However, foreign investors remained substantial sellers of domestic equities for a third straight week, selling a net R9bn, a substantial amount following net sales of R4.7bn and R4.5 in the previous two weeks.
While net foreign equity purchases for the year-to-date remain positive at R19.28bn the heavy R18.2bn net selling over the past three weeks lifts the chances of a market correction in the near-term.
South Africa political overview
• President Jacob Zuma’s appointment of his close ally Vuma Mashini as the new head of the Independent Electoral Commission (IEC) has raised some concerns ahead of next year’s local government elections.
Mashini has been Zuma’s special projects adviser since 2012, prompting political opposition parties to question the credibility of future elections. However, Mashini is clearly qualified for the job having served as deputy chief electoral officer for the IEC from 1998-2001.
The scope for rigging elections is also limited by the collective nature of the institution limiting the influence of any individual.
The week ahead
• Consumer price inflation (CPI): Due on Wednesday, 21 October. According to consensus forecast CPI is expected to rise from 4.6% year-on-year in August to 4.8% in September due mainly to increasing food price inflation.
However, there is considerable scope for variation from the forecast as September’s data contains a high number of survey updates. On the plus side the petrol price fell during the month by 5.3% which should stem the CPI increase.
• Retail sales: Also due on Wednesday. According to consensus forecast retail sales growth is expected to slow from 3.3% year-on-year in July to 2.7% in August as declining consumer confidence continues to take its toll. At the same time the statistical base effect of last year’s low comparative data is starting to fade.
• Medium-Term Budget Policy Statement (MTBPS) on Wednesday. A budget overrun is likely as tax revenues decline in the context of slowing GDP growth and expenditure exceeds projections due to the costly public sector wage deal and demands from state-owned enterprises.
The MTBPS will be more closely watched than usual as international credit rating agencies have cited fiscal prudence as key to the country’s future long-term sovereign debt rating.
Technical analysis
• The rand remains below successive support levels suggesting a continuation in the rand’s depreciation. Although the rate of the rand’s depreciation is accelerating there is no sign yet of panic selling or capitulation. This stage needs to be reached before a reversal in the rand’s move can occur.
• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
• Despite the recent uptick in bond yields the long-term JPMorgan global bond index bull trend remains intact, with the yield targeting a new low during the fifth and final wave.
• The US 10-year Treasury yield has broken above key resistance levels of 2% and 2.2%. However, there is unlikely to be a major bear trend in US bonds as the deleveraging phase is still in its early stages.
• The benchmark R186 SA Gilt yield is testing support at 8.70% which if broken could open a new target of 9.5%.
• The MSCI World Equity index has broken downward from a rising wedge formation which has been intact since the 2008/09 global financial crisis. It is unlikely that the downward move is over as the correction so far is too small for a bull market of the magnitude and duration of the 2009-2015 bull market. The downside target for the MSCI World Equity index is 1 400.
• Since the 1950s the Dow Jones and S&P 500 have displayed 7-year up-cycles and the top of the current US equity cycle can be expected in the next year. The next major wave down will complete the 16-17 year secular bear market that started in 2000. The secular bottom should occur around June 2016.
• The S&P 500 has broken down from a rising wedge pattern, which is traditionally a trend-changing pattern. The break below the 2070 level confirms a reversal of the upward trend. A further negative signal is that the Dow Jones Transport Index, traditionally a lead indicator for the broader market, is leading the broader market lower on the downside.
• Brent crude’s break below the key $50 support level suggests a continuation of the weakening long-term trend. Copper is regarded a reliable lead indicator for industrial commodity prices and barometer of global economic growth. It has broken below the key $5 300 support level suggesting further downside ahead.
• Despite recent advances Gold is in a protracted bear market signalled by rapid declines through successive support levels at $1300, $1250 and $1100. Gold’s next target is $1000 which is likely to be breached before the bear market ends.
• The All Share index has broken below its bull market support level which has been intact since 2009. The downside target for the All Share index is 41 000.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
