Budget 2023
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Risks for downgrades remain, warns economist

Johannesburg - There are solid fiscal and monetary policies on the surface, but low potential growth is being held back by the micro policy choices available, according to emerging markets economist Peter Attard Montalto of Nomura.

He said Finance Minister Nhlanhla Nene's mini budget puts the likelihood of short-term downgrades from the agencies in more doubt.

Montalto, however, expects Moody's and other agencies will lower the rating in any event in the medium run.

"South Africa has gone for austerity (-ish) and tax hikes to achieve the same projected consolidation path after a sharp downward revision in the growth outlook," said Montalto.

"This conservative fiscal stance can only be achieved politically given the argument that the Treasury has won around increasing space for grants to the poor and more left-wing microeconomic policies at the expense of tighter fiscal policy overall."

In Nomura's view Eskom support still lacks much of the required additional details, though the fabled debt-equity conversion has been raised along with equity asset sales, as expected.

READ: Nene: Eskom won't need to convert R60bn loan

"We still see considerable medium-run fiscal risks on a number of fronts, but the reaction function means the market and funding risks from that are less," said Montalto.

In his mini budget preview Nomura highlighted that behind the scenes in government and the ANC the mood had shifted on the risks and costs associated with ratings downgrades, as well as the increasing crisis at parastatals (especially Eskom), and so the space for fiscal conservatism was increasing.

"That space turned out to have been bigger than even we expected in our preview, suggesting the behind-the-scenes crisis was greater. The broader policy implications are limited, however," said Montalto.

"We think the ANC and the government are wanting increasingly to keep macroeconomic policy conservative to provide more room for ‘business as usual’ policies to the left on the micro front to satisfy captive interests and the party. The increasingly strong business, tenderpreneur and BEE base within the ANC are driving part of this balance between micro and macro in our view."

READ: Ignore ratings advice, Cosatu tells Nene

Nomura remains concerned that, after the conservative mini budget, this stance misses the point about keeping investors happy.

"Growth is the key and markets, though supported at least in the short term by a contained issuance number, will worry such fiscal policy direction cannot remain in the long term if growth is so low," said Montalto.
 
"We think the rating decisions due through the fourth quarter hang very much in the balance now. We note that the agencies only see fiscal policy as one of the pillars of a negative ratings bias."

Subtly different

Overall, Montalto sees Nene’s mini budget speech as subtly different from his predecessor Pravin Gordhan.

"He is less on the political rhetoric bandwagon, more conciliatory in tone, laying out stark truths and difficult but necessary solutions in a technocratic and calm manner," said Montalto.

"Low growth may have made his life easier, with the broader mood changes mentioned above also helping him avoid more political difficult confrontations within the cabinet – but that situation in our view and with our growth forecast is unlikely to change any time soon."

READ: Mini budget worth a cheer


Personnel freezes

Nomura is a little sceptical on this front as personnel expenditure freezes have been tried on several occasions in the past, but have generally failed to work because of the political imperatives to create jobs and boost employment numbers.

Equally, the defunding vacancies issue was not properly enforced last time because of personnel moves and temps taken on to maintain funding levels by departments.

"The other usual risks remain – in particular on public sector wage growth, which we still see as a major risk to fiscal policy. The mini budget only assumes inflation increases, whereas some 15% has been demanded by unions," said Montalto.

"We still think politically it will be very difficult for the government not to give a 2% to 3% real increase over inflation. This will be a key test next year, where the micro and macro policies and politics collide."

READ: Government headcount to be frozen

Parastatals

Nomura was "underwhelmed" by the part of the mini budget on Eskom as there was still a lack of detail on the issue.

"While the allocation of some R20bn was expected and it was stated there would be the sale of property, liquid equity holdings and other assets, there was no detail on the assets to be sold (even though Vodacom and Telkom are the only two that are government-owned liquid equity assets), the time lines or the sequence," said Montalto.

"Talks are ongoing about which out of a 'long' list of total assets could be realised to raise the R20bn. That said, there was a mention of the potential need for a debt for equity swap on the state's outstanding loan lines to Eskom, but it seems this would only be realised in the eventuality that there would not be sufficient money raised through asset sales."

This R20bn requirement is only a short to medium term hole in the balance sheet and there is a much larger hole still in the long run that remains somewhat unclear even including higher tariff increases, increased borrowing and the measures already announced, according to Montalto.

"There was interesting mention of South African Airways, South African Express, the SA Post Office and the Land Bank and the need to clean up the balance sheets of these companies, but no mention of how this would happen," he said.

READ: No bailouts for SAA, Sapo

- Fin24

* Visit Fin24's Mini Budget Special for all the news, views and analysis.

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