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Johannesburg - In tough times, Finance Minister Pravin Gordhan delivered a mini budget of few surprises, Absa said on Wednesday.
As was widely expected, Gordhan revised lower the economic forecasts put forward by National Treasury at the reading of the National Budget in February this year, said Absa private client asset management head Craig Pheiffer.
"With the International Monetary Fund, the SA Reserve Bank (Sarb) and the markets in general looking for domestic Gross Domestic Product (GDP) growth of just 2.0 percent in calendar 2013, it was no surprise that the minister reduced the growth outlook for the fiscal year 2013/14 to 2.1 percent from an original estimate of 2.7 percent," he said.
Growth expectations for 2014 were reduced to 3.0% from an original 3.5%, while that for 2015 was cut to 3.2% from 3.8%.
"For the first time we were shown government's thinking on the 2016 year and growth for that period was estimated at 3.5%," said Pheiffer.
"The disconcerting fact is that for three years following 2013, we are still faced with growth that is insufficient to make a meaningful impact on the unemployment rate," he said.
The National Treasury's outlook for the current account deficit had always been more positive than that of the market, and while Gordhan painted a slightly worse picture for the ensuing years, the outlook was still better than that expected by market economists.
Slight modifications to inflation expectations, with an initial consumer price index forecast for 2016 at 5.4%, was in line with market and Sarb thinking that consumer inflation would be anchored within the target range for the foreseeable future, albeit at the top of the range.
"If there is any one number that is important to watch in the MTBPS (mini budget), it is the budget deficit expressed as a percentage of the country's GDP," said Pheiffer.
"Budget-watchers were anticipating a lower forecast for growth and consequently lower tax receipts and a wider budget deficit.
"What was not expected was the change in the reporting approach of the budget numbers in line with the IMF's Government Financial Statistics Manual.
"By including so-called 'extraordinary transactions', budget revenues increased by R11 billion and budget expenditures reduced by just R0.2bn to create a smaller budget deficit of 4.2 percent rather than the 4.6 percent estimated in the February Budget."
Gordhan was clear that the two numbers meant the same thing, and did not try to imply that the deficit had fundamentally improved.
Pheiffer said the trend in the budget deficit over the next few years was what the ratings agencies would carefully eye carefully and unfortunately, even with the new system of reporting, the deficit only fells to 3.0% by 2016/17.
"Allied to the budget deficit outlook is the outlook for the level of government indebtedness. With the deficits of the next three years being revised wider, the expected magnitude of South Africa's debt to GDP ratio has also increased over the timeframe of the medium-term expenditure framework and beyond," he said.
Net debt to GDP was expected to increase from a revised 39.3% this year to almost 44% in 2016/17.
With 10% of budget expenditure already going towards interest payments on debt, the extended period of counter-cyclical fiscal policy was eating into expenditures that could be better used to create additional productive capacity within the economy.
This would also be taken note of by the credit ratings agencies in their forthcoming ratings deliberations. Pheiffer said there were no meaty changes to policy or any contentious issues raised.
"There was not a peep on the carbon tax, for example or any word on the National Health Insurance this time around.
"What did provoke a fair amount of heckling and humour was the Finance Minister's crackdown on public sector costs and the abuse of government privileges," he said.
"The biggest gasp from the parliamentary audience was not from the announcement that public funds could no longer be used to purchase alcohol at public functions, but that credit cards would no longer be issued to public sector staff and that those currently in issue would be cancelled immediately."
He said that overall the outlook was still for a low growth environment for the next three years, with a modestly improving budget deficit and a rising level of sovereign indebtedness.
"It remains to be seen whether the ratings agencies have found enough in today's announcement to maintain our rating at its current level. We will not have to wait long to see as Standard & Poor's and Fitch will be in town soon."
