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Cape Town - There was enough in the mini budget to avoid a downgrade by Moody’s right now, according to emerging markets economist Peter Attard Montalto of Nomura.
He cautioned, however, that a downgrade still looks likely due to strong downside risks to South Africa's economic growth next year. He added that the fiscal-related hurdle to an S&P downgrade to junk is still too great.
Although the mini budget did not offer any new policy to support growth, in Montalto's view, Finance Minister Nhlanhla Nene's message was that there is simply no wiggle room left for the future.
"Difficult choices are needed, ones that probably cannot be made at the budget in February with the local elections ahead. National Treasury will be praying, hoping, that they do not have to revise growth numbers down again. They won’t have contingency reserves to fall back on," said Montalto.
He regards the mini budget as "credible, but partial or patchy".
"By the end of the forecast horizon [Treasury] may be overestimating the nominal GDP level by round 2%. Setting of the expenditure ceiling off 2.5% long-run growth also shows the degree to which long-term potential growth forecasts in Treasury are falling," said Montalto.
"The mini budget was National Treasury doing what it does best: keeping the macroeconomic ship in order, but unable to pull the wider economic policy levers. The negative rates reaction is probably justified, given the higher issuance numbers, but we think local asset managers will see some value to buy on this dip," said Montalto.
In his view the consolidated budget assumes too high a level of nominal gross domestic product (GDP) growth in the outer two fiscal years, as well as too constrained a level of debt service costs to realise the sub-50% GDP gross debt profile presented.
Other negative points for Montalto include the minimal level contingent reserves now in the framework, the level of government employment level freezing assumed - which he thinks is unlikely to be realised into local elections - the commitment to nuclear, increasing net long-term debt issuance levels and the increase in benefits allocations.
On the positive side for him are the expenditure ceiling that was kept in place and further tax hikes proposed, especially VAT as a possibility.
Weak growth punctures revenue prospects
Sanisha Packirisamy, economist at MMI Holdings, said the weaker growth punctures revenue prospects.
"Against the backdrop of a more subdued global economic recovery and muted domestic prospects, National Treasury has had to revise down their real GDP growth forecasts between the financial year 2015/16 and the financial year 2017/18 by 0.5% (on average)," explained Packirisamy.
"This leaves the three-year average close to our own internal forecasts projected at 2%. The largest growth revision has been to the financial year 2015/16 where weaker commodity prices and energy supply constraints have prohibited higher rates of growth."
Nominal GDP growth estimates over the same time period have been adjusted down by a lesser 0.4% (on average), given upward revisions to Treasury’s inflation profile.
"Treasury now expects inflation to average 5.8% between the financial year 2015/16 and the financial year 2017/18. This is 0.4% higher than their estimates in the February 2015 National Budget," said Packirisamy.
"This is on the back of electricity tariff concerns and a weaker currency, while they have kept their oil price forecast in a tight range over the next three years."
Packirisamy said Treasury warns that firms’ ability to absorb higher input costs may narrow if rand depreciation and shrinking profit share continues, resulting in upside risks to their upwardly-revised inflation trajectory.
Market research company Citi Velocity expects global growth in 2015 to be 2.6% at current exchange rates, but it is cutting its 2016 global growth to 2.8% from the previous month's forecast of 2.9%.
This is the fifth consecutive downgrade Citi Velocity has made to its 2016 global growth forecast.
"If we adjust for the probable mis-measurement of China’s GDP growth in official data, “true” global growth is probably around 2.25% this year and also is likely to be below 2.5% in 2016 - that is well below the 3% long-run norm," Citi said.
"Emerging market growth on this measurement-adjusted basis probably is about 2.5% year-on-year this year, the lowest since the late 1990s. Even after these downgrades, risks to our global forecasts probably lie to the downside."
George Herman, head of South African portfolios at Citadel, said on a positive note, he is very pleased to observe the conservative nature of the assumptions that the MTBPS is based on.
"The underlying variables are pitched at realistic levels implying that the risk of future disappointments is reduced while also displaying a welcome level of openness on the part of Treasury," said Herman.
