In arguably the most challenging macro and political backdrop since the dawn of democracy, Finance Minister Tito Mboweni had to deliver a credible budget that not only appeased the rating agencies, but gave credence to President Ramaphosa’s reform promises while keeping the electorate, as well as the ANC factions, on side.Based on the market reaction, which was a very brief sell-off in the rand and bonds (and then recovery), investors view this Budget as a credible projection of how to balance the books while bailing out Eskom.
It is unclear whether enough was done to avoid a credit rating downgrade down the line, but sentiment seems to side with an unchanged rating and outlook when Moody’s reviews the rating on 29 March 2019.
However, the underlying fiscal position remains extremely fragile. Simply put, we are risking service delivery and debt stabilisation to stand in for Eskom on debt service and capital repayments.
Here is our quick take on the positives and negatives in the 2019 Budget Review:
Positives:
- This is a credible budget, both in terms of the numbers and the commitment to assist the reform process.
- While it was light on direct tax rate hikes, this was not an electioneering budget with regard to expenditure.
- There will be spending reprioritisation to cater for Eskom’s cash injection, which will also be made with strict conditionality. There is no debt transfer.
- This is the first budget in which National Treasury is making a more concerted effort to address the bloated wage bill. Measures are indirect, making use of natural attrition and early retirement, as well as salary freezes for high-income employees (e.g. members of parliament and provincial legislatures). This is important given that it is an election year and we have seen, as recently as last year, how much sway the unions can have in fiscal decisions.
- Outside of Eskom, SOE support will be deficit neutral, i.e. injections will be funded via the sale of non-core asset.
- There is significant commitment by National Treasury to capacitate SARS: a new tax commissioner will be announced soon, the Large-Business Unit will be rebuilt by April this year, and IT infrastructure will be enhanced. Encouragingly for small businesses, Treasury endeavours to eliminate the backlog in VAT repayments in FY20.
- There are no new tax rate hikes for FY20.
- National Treasury will tighten the conditions for guarantees to SOCs, linking support explicitly to capex and specific projects rather than opex on a just rolling basis.
Negatives:
- While credible, the budget is still short on the exact conditions and timelines to be placed on Eskom. As always, implementation risk is high and it is not clear that the R6bn increase in the contingency reserve in FY20 is enough of a buffer for SOC bailouts (beyond Eskom).
- The fiscal trade-offs were stark: the fiscal position is being hamstring to support Eskom.
- Consolidation is still back-loaded, leaving notable risk in the interim to exogenous shocks.
- The debt ratio marginally breaches 60% of GDP – historically a key level for ratings agencies.
- The nominal expenditure ceiling, which serves as the fiscal anchor, has been increased to accommodate the Eskom bailout.
- While Eskom support is pragmatic, it does not reduce the contingent liability risk posed by the systemically important SOC.
- The additional allocation of R6bn for possible SOE demands, as well as the substantial support to Eskom, potentially creates moral hazard.
- The downside of managing the wage bill via early retirement is that the state risks losing skills and institutional memory, which could weakens the capacity of the state.
