Budget 2023
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Nene's real test is to curb spending

Cape Town - The real test in the mini budget (Medium Term Budget Policy Statement) will be whether - given higher inflation views - real expenditure growth can be reduced to less than 1%, namely a true cut in the nominal expenditure ceiling.

This is according to emerging markets economist Peter Attard Montalto of Nomura.

"We are optimistic that this may occur. A number closer to zero would be a real political success for the National Treasury, though compositional concerns would remain. We have doubts though that such a low real expenditure growth ceiling would survive large tax increases next year," he said.

"Expect the mini budget on Wednesday to be largely market-neutral."

He expects conservative fiscal elements to be offsetting wider support for the public sector and parastatals - including guarantees for the likes of SAA.

"Overall, we don’t expect any dramatic policy changes, with the exception of a tighter expenditure ceiling. But, at least in the short run, the message will be clear that growth can be sacrificed to support the country’s sovereign rating," said Montalto.

"We question, however, the political sustainability of this policy through next year’s budget."

Vulnerabilities remain in terms of cyclically-adjusted primary deficits as well as changes, momentum and shock vulnerability to gross debt and the structure of current expenditure versus investment expenditure.

"The ‘fuss’, as we see it, surrounding SA’s fiscal situation has more to do with the market’s limited willingness to absorb yet another round of counter-cyclicality. As a result, we continue to forecast a consistently upward long-run debt trajectory, which under shock scenarios flips higher still," said Montalto.

The fiscal policy backdrop

Nomura believes the National Treasury has been ready to apply emergency breaks to expenditure to deal with impaired market access.

"Since the budget in February through the election and shift in cabinet, the cabinet and the wider ANC have come to better comprehend the challenges the wider public sector - and Eskom in particular - have been facing, how these play into the country’s rating and what that in turn means for SA’s political economy," said Montalto.

"Hence, policy has started to shift, at least in some parts of government, on the marginal inclusion of the private sector in greater energy production capacity, for instance."

Equally, the National Treasury has managed to get the cabinet to agree to "leveraging of state assets", which to Nomura, means privatisation.

"We would hardly call this enthusiasm, but instead pragmatism, and wider micro regulation of the private sector is not positive," said Montalto.

Key fiscal aspects of the mini budget

Nomura forecast key outcomes on the fiscal side in the mini budget:

- Lower gross domestic budget (GDP) and marginally higher inflation views, resulting in net lower nominal GDP;

- Lower revenue on weak growth and strike action, with no ability for tax changes at this time, but some broad hints leading into the budget next year through updates on the Davis Commission process;

- A lowering of the expenditure ceiling, which was to see real average growth of non-interest expenditure of only 1.8% over the medium term expenditure framework period.

This would result in a further rotation away from investment expenditure towards current expenditure, and particularly maintaining social grant expenditure, which will be maintained at previously announced levels;

- A rise in contingent liabilities to support Eskom, SAA and other parastatals, though minimised by greater expectations of future tariff increases.

Tighter expenditure

"It is difficult to say exactly what a new, tighter expenditure ceiling might look like. We suspect it may be back-loaded because of weaker growth in the short run," said Montalto.

"Incorporating the effects of higher inflation of around 0.5% to an unchanged nominal expenditure growth rate, would mean compression of real expenditure, but only to around 1.3% from 1.8% seen in the February budget."

Strike action

"Strike action has yet to affect revenue, largely because revenue is lumpy and highly seasonal, with major peaks in June and December. The amount that this is factored into the forecast by the National Treasury will be a key credibility test of the mini budget," said Montalto.

"We suspect total revenue growth this year may be 4% to 5%, compared with 8.8% budgeted."

Severe gaps in fiscal picture

- Public sector wage growth has always been an issue, but with the unions’ opening gambit of 15% for the forthcoming negotiation cycle, a presidential promise of a public commission of investigations and the budget only factoring in a real 1% rise - that is around 6.4% over the coming three years in the February budget - means there are severe upside risks here to the compensation account;

- Eskom support will be off balance sheet, and while appearing in contingent liabilities there will be no acknowledgement of the future risks to on-balance sheet support that may have to be provided in the future. This is true for other parastatals as well;

- Nomura doubts very much that the National Treasury will have the space to grow, or even maintain, the existing contingency reserve. This buffer amounted to a tiny fraction of total revenue and expenditure, however, and does not really sway the needle that much. Its potential removal and drawdown, however, is likely significant for markets when combined with analysis on funding requirements;

- Nomura thinks the interest cost assumptions will likely be too low because of overly optimistic assumptions surrounding the rand and a more limited rate cycle.

The headline forecast

"As always we think the possibility of unrecognised risks and higher growth assumptions (even if they still do make a big move) will explain the difference between our forecast and expected announced values," said Montalto.

"We broadly expect the previous reductions in the gross net financing requirement to be reversed by weaker growth and the lack of tax changes at this time. Additional funding is expected to be generated mainly from cash drawdown and greater foreign exchange debt issuance."

More broadly, any announcements on Eskom will set a much clearer understanding of the level of sovereign support for parastatals and how future bailouts could work.

Debt ceiling

"We expect no shift on the application of any debt ceiling or wider fiscal rules that were promised two years back. This process has largely fallen into the background, with the expenditure ceiling the sole, preferred measure," said Montalto.

"We expect some further updates on arrangements for pensions over the medium run, which should be supportive of the long run, with greater savings encouraged. There will have to be further reassurances against state-capture of existing pensions savings though, which remains an issue of concern locally."

Broadly, Montalto expects no major structural or other policy announcements to be made at this time, because of the lack of fiscal room – save for what he calls "the usual smattering of expenditure here and there for different pet political projects".

"We expect no significant shift in capital controls, no mandate change for the SA Reserve Bank and no major other policy changes at this time," he said.

- Fin24

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