Gigaba's credibility on the line in maiden mini budget

2017-10-25 13:30
Finance Minister Malusi Gigaba. (Photo: Gallo Imag
Finance Minister Malusi Gigaba. (Photo: Gallo Images) ~ Gallo Images

Cape Town - There will likely be no shift in the mandate of the South African Reserve Bank's monetary policy committee in Finance Minister Malusi Gigaba's first mini budget speech, set to be delivered on Wednesday afternoon.

This is the view of emerging markets economist Peter Attard Montalto of Japanese bank Nomura.

He also does not expect to see a shift in capital control rules at this time.

As for news on a state-owned bank, Montalto said supportive comments in this regard are widely expected and a further update on enabling legislation for licensing the Postbank is likely. At the same time, he does not expect any meaningful move on this in the short term.

Montalto also pointed out that the auditor general has increasing concerns about PetroSA, which made a R1.4bn loss in the last fiscal year and looks "increasingly unsteady".

However, Montalto said a recent Russian investment of $400m in joint oil and gas projects may remove the need for Treasury to do anything major at this stage.

In his mini budget Gigaba will remove much uncertainty surrounding his fiscal world view, explained Montalto, who sees the political backdrop as the fundamental issue at stake for Gigaba.

"We believe the broad fiscal headline narrative will not change: grinding underperformance, partly pushing out consolidation, expenditure contained but not meaningfully cut, and debt and issuance levels grinding higher," he said.

"The big uncertainty will be over how much is pencilled in and how quickly there will be state-owned enterprise (SOE) support for SAA, Eskom and others, and the asset sales that will have to accompany this."

Montalto does not expect a "blow out" in the mini budget. He does feel, however that credibility will likely be tested if "anonymous" revenue hikes are leaned on too much and there is over-optimism about growth forecasts.

"We expect the deficit to move out by around 0.9 percentage points of gross domestic product for the current fiscal year, but the mini budget may well see a slightly smaller number presented," said Montalto.

"There is unlikely to be any definitive blow on the ratings side, but it is likely to push agencies further down the path towards cuts into 2018."

In his view, the issue of market interpretation is particularly important regarding this mini budget, because expectations have already been at low levels.

"This is particularly true for local, onshore investors, but also increasingly now by foreign investors."

As for credit ratings, Montalto expects all agencies to take a dim view of debt levels grinding higher and movement away from consolidation. At the same time, he thinks there will be no dramatic news on this front.

"We think most ratings agencies’ focus will be on SOE issues, where there can be more details in terms of announcements with credit implications," said Montalto. "We expect all agencies to sound particularly gloomy in their updates in November."

He sees very little room for expenditure cuts, and therefore thinks the reserves will be utilised.

"Overall, however, we think the mini budget remains much more a revenue issue than a (non-interest) expenditure issue in the short term," said Montalto.

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