Mini budget all but comforted ratings agencies - economist

Cape Town - Trust deficit issues aside, Finance Minister Malusi Gigaba’s first medium-term budget policy statement grossly underwhelmed expectations, said BNP Paribas economist Jeffrey Schultz in a company note on Wednesday.

This year’s mini budget painted a gloomy picture of SA’s economic realities with growth revised downwards to 0.7%, a R50.8bn revenue shortfall and debt that is expected to stabilise at around 60% to the gross domestic product (GDP) by 2022.

Schultz said the fact that no adjustments were made to the expenditure ceiling was a “major downfall” in Gigaba’s mini budget speech on Wednesday.

Gigaba warned that SA’s expenditure ceiling, introduced by his predecessor Pravin Gordhan, is in danger of being breached in the 2016/17 financial year by as much as R3.9bn.

In 2012 expenditure ceilings were introduced to enable government to manage spending levels in the context of a constrained fiscal framework.

“Fiscal consolidation plans seem to have been largely abandoned. The main budget deficit is now forecast at 4.7% of GDP in the 2017/18 financial year and is expected to track broadly sideways at 4.6% of GDP by the 2020/21 financial year.”

Treasury’s tax buoyancy assumptions have correctly seen large downgrades, Schultz said.

“Failure to lower the non-interest expenditure ceiling means that attaining a primary budget surplus over the medium-term is now no longer a priority for the new Treasury leadership.

In addition, debt service costs are set to climb rapidly alongside embattled state-owned enterprises (SOEs), which will put additional pressure on the fiscus.

“Ratings agencies will undoubtedly view the mini budget in a negative light,” Schultz said. “Not enough was done to instil confidence that fiscal consolidation remains front of mind for Treasury.”

BNP Paribas expects both Standard & Poor (S&P) and Moody’s to downgrade both the local and foreign currency ratings on 24 November.

“This will trigger an exit from key global bond indices,” Schultz said. 

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