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Does the mini budget change anything for asset allocators?

Four economists give their views on what asset allocators should be thinking about following the MTBS presented by Finance Minister Tito Mboweni.

Finance Minister Tito Mboweni was always facing a nearly impossible task in tabling the Medium Term Budget Policy Statement (MTBPS) on Wednesday. Given what everyone already knows about the state of South Africa’s economy and the country’s fiscal challenges, he was always going to be delivering bad news.

However, it seems that the MTBPS largely failed to inspire any significant confidence that government is meeting the moment with the necessary urgency.

As summed up in a statement by Business Unity South Africa:

‘Debt continues to increase; the revenue shortfall continues to increase and there is no sign of the structural reforms sorely needed to create an environment for investment. We are concerned that, even though we are borrowing R 2,1 billion per day, money is diverted into projects, like SAA, that have no chance of providing an economic or social return.’

For local asset allocators, this leaves the question of whether this latest budget update changes anything. Has it shifted the outlook in any meaningful way?

We asked three economists to give us their views.

Scroll through the slides to read their responses.

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Finance Minister Tito Mboweni was always facing a nearly impossible task in tabling the Medium Term Budget Policy Statement (MTBPS) on Wednesday. Given what everyone already knows about the state of South Africa’s economy and the country’s fiscal challenges, he was always going to be delivering bad news.

However, it seems that the MTBPS largely failed to inspire any significant confidence that government is meeting the moment with the necessary urgency.

As summed up in a statement by Business Unity South Africa:

‘Debt continues to increase; the revenue shortfall continues to increase and there is no sign of the structural reforms sorely needed to create an environment for investment. We are concerned that, even though we are borrowing R 2,1 billion per day, money is diverted into projects, like SAA, that have no chance of providing an economic or social return.’

For local asset allocators, this leaves the question of whether this latest budget update changes anything. Has it shifted the outlook in any meaningful way?

We asked three economists to give us their views.

Scroll through the slides to read their responses.

Kevin Lings - Stanlib

I’m still not getting a sense that there is the right level of urgency.

I don’t think it changes anything for asset allocators in the short term. The bond market was focused on whether there would be a change in the debt issuance, and that hasn’t changed. That would be seen as encouraging. As would the fact that, in the short term, there aren’t meaningful changes in the overall parameters that were sketched.

The fact that government, on the face of it, is intent on entrenching more fiscal discipline in areas that have gotten out of hand, particularly on the consumption side, would also be encouraging. So, in the immediate investment horizon, there is nothing that is going to have a material effect on asset allocation.

Over the medium to longer term there are other implications. The fact that we now see an elevated level of government debt as opposed to what was presented in April is quite meaningful. It does suggest that interest costs are going to ramp up at a fairly rapid pace. So the risk of some form of outright fiscal crisis has clearly increased.

You also have to evaluate whether this intention to control the wage bill is likely to be achieved. And, clearly, if it becomes evident that it can’t be achieved, given that so much of the fiscal consolidation rests on that, then there would be some effect on asset allocation.

The minister made it clear that government is running out of time to implement on these things. There is a little bit of headroom to do something, but if you don’t implement, then these decisions will be taken away from you. The markets will be making those decisions, and all of this will be forced on you in a hurry. But I’m still not getting a sense that there is the right level of urgency.

Sanisha Packirisamy - Momentum Investments

The proof will be in the implementation pudding.

There is a lot of risk attached to how they are trying to achieve fiscal consolidation. By and large, it’s not by revenue increases. It is all coming through from the expenditure side.

When you dial down into that, a lot hinges on the wage bill, and there aren’t that many other levers to pull if that doesn’t materialise.

If you look at the numbers, the current year isn’t much of a surprise relative to what analysts were expecting. In some cases they are slightly better. But there is a slower pace of consolidation pencilled in after that, and that, together with implementation risk is what worries markets.

Down the line, there are longer-term fiscal risks and questions about how they are going to be funded. They brought up NHI (National Health Insurance) again, even though the healthcare budget will decline in real terms over the next three year. There is also a massive liability building in the Road Accident Fund. And you have massive risk sitting at municipal level

They have also extended the social relief grant, but come the end of January next year, the employment outlook is still going to look quite bleak. How are we going to support the livelihoods of those that have been heavily reliant on these grants? There are calls for a basic income grant, but that means additional expenditure.

These are big funding pressures in terms of expenditures long term, and those haven’t been addressed. So, not only we sitting with shorter and medium-term fiscal risks, but also longer-term risks. We may get some colour on this next year. But I think that will be quite key.

The fact that South African is standing out from its peers, to the unfavourable side, does place us on a weaker footing. Even though the ratings agencies may give us the benefit of the doubt this time, the bias is definitely to the downside next year.

Isaah Mhlanga - Alexander Forbes Investments

The market has run out of patience.

There is nothing in the budget statement that really changes anything. In terms of debt issuance, national treasury is not changing anything.

From a messaging point of view, it seems slightly positive in terms of structural reform, and the promise of better growth eventually once the consolation is done. But a lot of it is really hedged on the reduction of the public sector wage bill.

In fact, I am tempted to believe that we are likely to see debt spiral much higher than 95.3% of GDP and the fiscal deficit widening to more than 14.6% because they are not going to achieve the public sector wage bill reduction.

Implementation remains the key issue. Our bond yields have widened significantly relative to other emerging markets. That just tells you that the market has run out of patience, and things are likely to worsen going forward because growth is not going to come any time soon.

The cuts in public wages remain unlikely because it is government up against the unions. Next year is a local government election and the unions are going to use that to force government’s hand.

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