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Focus On Gauteng’s 2023 Medium-Term Budget Policy Statement

MEC Mamabolo delivers Gauteng’s medium term budget policy (full speech)

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South Africa’s medium term budget will be a defining litmus test on whether the government can take the country out of an economic slump or send it in the direction of a financial crisis.

#MTBPS2020: A tightrope walk for Finmin Mboweni

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South Africa will be waiting in anticipation tomorrow to hear what the Finance Minister, Tito Mboweni has to say as he addresses government plans for the next three years at the medium-term budget policy statement. CNBC Africa&#8217;s Kopano Gumbi filed this special report.

What will the outcome be for finmin Mboweni’s MTBPS?

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As Public Enterprises Minister, Pravin Gordhan announced a special paper on Eskom and unemployment hit a 11 year low the Currency took a hit. The rand reversed the gains of recent past, losing as much 20 cents to the dollar. Will tomorrow&#8217;s medium-term budget policy statement by Finance Minister Tito Mboweni also wag the currency tail? What will happen to our state owned enterprises? Xhanti Payi, Lead Researcher and Economist at Nascence Advisory joins CNBC Africa for pre medium-term budget policy statement (MTBPS).

Here’s what finmin Mboweni’s MTBPS should address to revive the economy

By Monique Vanek
In the forward to Medium Term Budget Policy Statement (MTBPS) it warns that South Africa finds itself at a crossroads and highlights the difficult economic and fiscal choices confronting government over the next several years. These are the key takeaways:
Economic
• The consolidated budget deficit narrows from 4.2% in 2019/20 to 4% in 2021/22. 
• Gross debt is expected to stabilise at 59.6% of GDP in 2023/24. 
• GDP growth revised downwards to 0.7 from 1.5% in 2018 following a recession in the first half of the year. 
• GDP growth is expected to recover gradually to 2.3% by 2021 
• Global economy expected to continue growing at 3.7% 
• Tax revenue has been revised down by R27.4 billion in 2018/19, R24.7 billion in 2019/20 and R33 billion in 2020/21 relative to the 2018 Budget. This mainly reflects higher-than-expected VAT refunds. 
• In 2017/18, for the first time since the 2008 global financial crisis, tax revenue growth did not exceed GDP growth. 
• The cost of servicing government debt is expected to exceed 2018 Budget estimates by R1 billion in 2018/19, R4.9 billion in 2019/20 and R7.9 billion in 2020/21. This reflects a larger main budget deficit, currency depreciation and higher interest rates. An estimated 15.1 per cent of main budget revenue will be used to service debt in 2021/22 compared with 13.9 per cent in 2018/19. 
• Main budget revenue is projected to increase from 25.7% of GDP in 2018/19 to 26% of GDP in 2021/22. Main budget expenditure is estimated to remain stable at 30.2% of GDP over the medium term
Where the money will go
• The Medium-term expenditure framework commits public resources of R5.9trn over the next three years. Of this amount: 
&#8211; R3.3trn or 56.2% t will be allocated to education, health, the provision of water and electricity services, and social grants. 
&#8211; 
• Government is proposing reprioritisation of R32.4bn over the next three years. Of this amount: 
&#8211; R15.9bn goes towards faster-spending infrastructure programmes. 
&#8211; R16.5bn will be allocated to various programmes, including recapitalising the South African Revenue Service (SARS), a minimum wage for community health workers, critical posts and goods and services in health, and streamlining the management of the justice system. 
&#8211; In addition, changes to grant structures amounting to R14.7 billion will promote upgrading of informal settlements in partnership with communities. 
&#8211; Housing subsidies amounting to R1 billion will be centralised to better support middle- and lower-income home buyers. 
• In the current year, R1.7 billion is added to infrastructure spending (including funding for fast-spending school building programmes) 
• R3.4 billion is allocated to drought relief, mostly to upgrade water infrastructure aside funding for this purpose. 
• R3.4 billion is allocated in 2018/19 to provide water, improve infrastructure and offset the economic costs of drought. Funding is also provided for the South African Isotope Facility at iThemba Labs and, following approval through the Budget Facility for Infrastructure, for the MyCiti Phase 2A bus programme in the City of Cape Town. 
• R800 million added to the school infrastructure backlogs grant to complete approved projects. 
• R3.4 billion is allocated to the education infrastructure grant. Funds are also allocated to the same grant to continue repairing infrastructure damaged by storms and floods in KwaZulu-Natal in 2017. 
• The Department of Women has developed a framework to provide free sanitary towels to learners from low-income households. The project rollout is funded through the provincial equitable share. 
• Local government equitable share, which finances free basic services to low-income households and some administrative costs for municipalities, is expected to grow by9.4 per cent per year to R82.2 billion by 2021/22. 
• Over the medium term, public transport expenditure is expected to increase to R101.1 billion as integrated public transport networks are built and operated in 13 cities.
State owned entities
• South African Airways will receive R5 billion through a special appropriation bill to settle debt redeeming between now and March 2019. This will help to prevent a call on the airline’s outstanding debt of R16.4 billion, which is guaranteed 
• R1.2 billion is allocated to South African Express Airways. 
• The South African Post Office receives R2.9 billion to reduce debt levels
National Health Insurance
• R166 million added to the national health insurance (NHI) indirect grant (health facility revitalisation) component to procure medical equipment and to design a new academic hospital in Limpopo. 
• R546 million reprioritised within the NHI indirect grant to address the critical shortage of medical professionals in the health sector, and to procure beds and linen for health facilities.
Tax changes
• In 2019 annual adjustments to personal income tax brackets, levies and excise duties in line with inflation are expected. 
• White bread flour, cake flour and sanitary pads will be zero-rated from 1 April 2019.
Students
• The Department of Higher Education and Training is developing a funding framework to clarify students’ food, book, transport and accommodation allowances, and the obligations required of bursary students during and after their studies. 
• Funds recommended through the Budget Facility for Infrastructure, and from educational institutions and the department, will support the Student Housing Infrastructure Programme. Over the next 10 years, it will provide 300 000 new beds at universities, and technical and vocational colleges. 
• Over the medium term, an estimated R61.5 billion in revenue from the skills development levy will continue to expand participation in learnerships, internships and skills development programmes.
Land reform
• Government is working with the Land Bank to accelerate land reform and maintain the productive use of transferred land. 
• Under the Land Reform Programme, government will provide 30-year leases, enabling the Land Bank to extend loans to emerging farmers. 
• The Land Bank will use a combination of loans and grants to increase production through the Black Producers Commercialisation Programme. Funding from the comprehensive agricultural support programme grant will be reprioritised to produce foot-and-mouth disease vaccines.

SA’s #MTBPS2018: Key takeaways

By Monique Vanek
The public servants wage bill remains the single largest component of expenditure in the Medium Term Policy Framework, but with elections approaching in 2019 the Medium Term Budget Policy Statement (MTBPS) provided no concrete plans to address this, only stating that government is working on an approach to manage these pressures over the medium term.
According to the MTBPS, public servants compensation, accounts for 34.7 per cent of consolidated expenditure, and forms the major driver of spending pressures. The MTBPS highlights that “it is one of the fastest-growing items in the budget, increasing at an average of 11.2 per cent a year”.
It adds that “the 2018 public-service wage agreement (see box) exceeded budgeted baselines by about R30.2 billion through 2020/21. National and provincial departments are expected to absorb these costs within their R1.8 trillion compensation baselines over the same period.”
The MTBPS also states that “over the long term, government and trade unions need to agree on an approach that ensures fair remuneration and a sustainable wage bill”. 
An annexure to the MTBPS deflects that issue of the amount of public servants to earnings growth, stating that “earnings growth, rather than headcount, has been the major driver of the public-service wage bill over the past decade”.
The annexure says an analysis of compensation spending since 2006/07 reveals the following trends:
• The main driver of increased spending is large increases in wages and other employee benefits, rather than increases in employment. 
• The increase in average real wages is partly explained by above-inflation agreements reached between government and unions, but wage progression and promotion policies account for a considerable proportion of the rise. 
• Wages have increased most rapidly in the lowest ranks of the public service, compressing wage distribution. 
• Overall, the number of public servants has increased since 2006/07. Employment peaked in 2012/13, after which personnel numbers have fallen by just over 1 per cent. This decline is insufficient to contain real spending growth due to continued growth in real wages. 
• There is a significant amount of turnover in the public service, with as many as 6 per cent of personnel leaving in a given year.

#MTBPS2018: Public servants’ wages balloon, but headcount is not to blame

By Monique Vanek
The Medium Term Budget Policy Statement (MTBPS) has confirmed that the South African Revenue Service (SARS) under its former Commissioner Tom Moyane delayed paying tax refunds, which is now hurting revenue.
According to its current Commissioner Mark Kingon, whether this was intentional or not is up for debate but he believes it was not intentional.
Kingon in a closed media briefing said SARS is currently evaluating why refund payments slowed.
The MTBPS points a negative picture of what happened to tax revenues under Moyane’s tenure and the aftermath: “A backlog of VAT refunds at SARS, and an underestimation of refunds due, has led to an overly optimistic view of revenue growth. Net VAT collections account for about R20 billion of the in-year revenue shortfall. Two factors account for the revision in net VAT. The VAT refund estimate has been revised upwards by R9 billion, and about R11 billion will be paid out to clear the backlog in the VAT credit book (see table).
“The remaining R7.4 billion of the shortfall in the current year mostly reflects slower corporate income tax collections due to weak growth in wholesale and retail trade, manufacturing and transport. Personal income tax continues to be negatively affected by job losses, moderate wage settlements, lower bonus payments and a slower expansion of publicsector employment”.
The MTBPS also states: “In 2017/18, for the first time since the 2008 global financial crisis, tax revenue growth did not exceed GDP growth. Revenue shortfalls have widened over the past four years, with under-collections rising from R7.4 billion in 2014/15 to R49 billion in 2017/18. These shortfalls would have been larger were it not for increases in personal income, dividend withholding, capital gains and other taxes. Revenue collections in 2017/18 were R0.8 billion lower than estimated in the 2018 Budget. Revenue collection for the first six months of 2018/19 grew by 10.7 per cent compared with the same period last year. However, the technical recession experienced in the first half of the year has begun to feed through to revenue collection, which has slowed. Weaker economic growth, alongside a once-off payment of overdue VAT refunds, will result in an in-year revenue shortfall now estimated at R27.4 billion, relative to the 2018 Budget estimate.”

#MTBPS2018: SARS withheld tax refunds under former Commissioner Moyane, these are the consequences…

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There could be anything from increased vat to zero rated chicken. The much anticipated budget policy speech will be delivered tomorrow. CNBC Africa correspondent Thasami Soobyah has more.

Expectations for policy change ahead of finmin Mboweni’s MTBPS address

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David French, Tax Consulting Director at Mazars South Africa joins CNBC Africa to talk about expectations from Finance Minsiter Mboweni&#8217;s Medium Term Budget Policy Statement.

Expectations from finmin Mboweni’s Medium Term Budget Policy Statement

By  Old Mutual Investment Group’s Head of Economic Research, Johann Els
The shocking abandonment of fiscal consolidation as a key policy anchor in the October 2017 Medium Term Budget Policy Statement (MTBPS) led to the downgrade to sub investment grade by S&amp;P and the credit watch by Moody’s.
Since then, however, the accelerated speed at which events have moved – mostly in a positive direction – has been encouraging, despite being unexpected. Considering that newly sworn in President Ramaphosa has strong business experience and was heavily involved in the creation of the acclaimed National Development Plan (NDP), it is more likely now that the ANC will return to their more pragmatic policies.
It is against this backdrop that Old Mutual Investment Group’s Head of Economic Research, Johann Els, believes the upcoming budget will need to be a lot tougher than what South Africa has seen in the recent past. “While we do expect a somewhat better economic environment during 2018, which should marginally improve the fiscal numbers, a clear return to fiscal consolidation is needed. This should include both revenue and expenditure measures to speed up narrowing of the budget deficit in a more sustainable manner in order to stabilise the debt ratio.”
Els warns, however, that this will not be easy and will likely be painful to most taxpayers. “Minister Gigaba has mentioned in parliament, following the MTBPS fiasco, that an extra R30bn in taxes would need to be raised in this Budget. While a tighter fiscal stance is clearly needed, it would also need to be balanced with the need to not hurt economic growth too much – a key requirement by Moody’s.
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“Thus, significant tax hikes are needed and would likely be concentrated at the top end of the income spectrum,” explains Els.
He outlines a number of options by which this could be done. “Fiscal drag, i.e. not making allowance for inflation pushing taxpayers into higher tax brackets, could raise R10bn, and an additional top marginal tax rate could result in a further R4-R5bn. R16bn could be raised by reducing tax expenditures via levying VAT on petrol (or alternatively a hefty fuel levy hike), while eliminating medical tax credits could raise R18bn (or R4-5bn if only for higher income groups). Since a wealth tax will probably not yet be introduced, capital gains tax and dividends tax rates could be raised again, along with normal excise and sin tax hikes, as well as the sugar tax.”
The big positive, however, would be a possible hike to the VAT rate, says Els. “While government has always said they will keep a VAT hike for when National Health Insurance is introduced, circumstances dictate that it might be necessary to consider this now. I do think that the probability of a VAT hike is higher now than over the past few years.
“A 1% hike in the VAT rate from 14% to 15% will raise around R20bn. Thus, a 2% hike could raise additional revenue of R40bn. Even if some of this is ‘given back’ as additional increases in social grants or additional zero rated goods, significant amounts could be raised which could make a serious impact on the budget. The probability of a tiered VAT rate structure has also become somewhat more probable. This, for example, could come in the form of a higher rate for luxury goods (20%?) and a still higher rate (30%?) for ultra-luxury goods.”
Within such an environment – coupled with likely sustained improvement in business and consumer confidence – Els predicts better economic growth for 2018. “There might even be some upside to our already above consensus 1.8% GDP growth forecast for 2018. This is a decent uplift from the 0.3% GDP growth in 2016 and the estimated 0.9% growth in 2017.
“Should politics continue to improve and the Budget marks a return to fiscal consolidation, then Moody’s might be willing to postpone a credit rating downgrade and the Rand could hold onto its gains. Under such circumstances inflation is likely to remain low – and likely lower than the Reserve Bank’s (SARB) forecast. Our own inflation forecast of 4.4% average for 2018 – already below consensus – could mean inflation rates below 4% over the next few months. This, combined with tighter fiscal policy, could lead to circumstances where the SARB could consider restarting its cutting cycle. We expect three rate cuts this year of 25 basis points each.”
Els concludes that while there are still many uncertainties, it seems reasonably clear that the improved political backdrop provides potential for a more positive outlook for 2018 than before. “The local currency and investment markets have already moved quite sharply to reflect much of this.

#Budget2018 needs to be tougher than what SA has seen in the recent past

Two of the primary global credit rating agencies (Standard &amp; Poor’s and Moody’s) are due to announce the outcomes of their review of the respective credit ratings of South Africa on Friday evening, 24 November 2017. Depending on the result, there could be far reaching effects on both the rand and local government bonds.
<a href="http://cnbc.africa/news/southern-africa/2017/11/23/fitch-ratings-affirms-south-africas-ratings-keeps-outlook-stable/">Fitch’s announcement</a> on Thursday was less significant though, as the agency has already assigned a sub-investment grade local currency credit rating to South Africa. In addition, the rating assigned to a country by Fitch is not a determinant of a country’s bonds in the Citigroup World Government Bond Index (“WGBI”).
The WGBI is the most used global bond index for both indexation and benchmark purposes and requires at least one rating agency between S&amp;P and Moody’s to assign an investment grade credit rating to the local currency government bonds for inclusion in the index.
Current situation
Following the cabinet reshuffle on 31 March 2017 and subsequent political events, all three the major rating agencies reacted by downgrading their credit ratings of South Africa as follows:
<table>
<tbody>
<tr>
<td width="201">Description</td>
<td width="77">S&amp;P</td>
<td width="77">Fitch</td>
<td width="77">Moody&#8217;s (S&amp;P equivalent)</td>
</tr>
<tr>
<td width="201">Foreign currency international scale rating</td>
<td width="77">BB+</td>
<td width="77">BB+</td>
<td width="77">BBB-</td>
</tr>
<tr>
<td width="201">Outlook</td>
<td width="77">Negative</td>
<td width="77">Stable</td>
<td width="77">Negative</td>
</tr>
<tr>
<td width="201">Ranking</td>
<td width="77">Sub-investment</td>
<td width="77">Sub-investment</td>
<td width="77">Investment</td>
</tr>
<tr>
<td width="201">Local currency international scale rating</td>
<td width="77">BBB-</td>
<td width="77">BB+</td>
<td width="77">BBB-</td>
</tr>
<tr>
<td width="201">Outlook</td>
<td width="77">Negative</td>
<td width="77">Stable</td>
<td width="77">Negative</td>
</tr>
<tr>
<td width="201">Ranking</td>
<td width="77">Investment</td>
<td width="77">Sub-investment</td>
<td width="77">Investment</td>
</tr>
<tr>
<td width="201">Date of last rating action</td>
<td width="77">3 April 2017</td>
<td width="77">23th November 2017</td>
<td width="77">9 June 2017</td>
</tr>
</tbody>
</table>
Table 2: Ratings assigned as at 20 November 2017
Outlook
Following the delivery of the <a href="http://cnbc.africa/videos/2017/10/26/sa-finance-minister-malusi-gigaba-delivers-mid-term-budget-full-speech/">medium-term budget speech</a> (MTBPS) by Finance Minister Malusi Gigaba on 25 October 2017, all the major rating agencies <a href="http://cnbc.africa/news/southern-africa/2017/10/30/moodys-warns-south-africa-medium-term-budget-signals-credit-negative-change-policy-direction/">expressed concern</a> regarding the deteriorating finances of the South African government. These concerns stemmed from the slippage in fiscal revenue and resultant increase in the forecast budget deficit.
Historically, the government has targeted gradual fiscal consolidation in the medium-term, which provided the rating agencies with a sense of comfort on the finances of the government. However, during this MTBPS, National Treasury forecast that the budget deficit would remain fixed at c.3.9% over the next three years, resulting in government debt to gross domestic product (GDP) continuing to increase to over 60% of GDP by 2021. This presupposes that no remedial action is taken of which none were proposed in the MTBPS.
The lack of a concrete plan to remedy the situation was one of the primary differences between this MTBPS and those of other finance ministers, and that has greatly contributed to the slippage in the bond yields and exchange rates.
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Although most market commentators expected a downgrade to the South African credit rating, most anticipated this to occur following the ANC elective conference in December 2017 and the delivery of the full budget in February 2018. However, the recent statements by the credit rating agencies have raised the probability of further rating downgrades occurring on Friday.
Possible outcomes
The announcements on Friday have four notable outcomes:
<ul>
<li>Neither Moody’s or S&amp;P takes any further action on the South African credit rating;</li>
<li>Moody’s downgrades the local currency and foreign currency international scale rating from Baa3 (BBB- S&amp;P equivalent) to Ba1 (BB+ S&amp;P equivalent), while S&amp;P’s rating remains unchanged;</li>
<li>S&amp;P downgrades the local currency international scale rating from BBB- to BB+ while Moody’s rating remains unchanged; or</li>
<li>S&amp;P downgrades the local currency international scale rating from BBB- to BB+ and Moody’s downgrades the local currency international scale rating from Baa3 to Ba1.</li>
</ul>
Possible bond yield movements
Our base case scenario is that the agencies will either place the rating on review for downgrade or pause until post February next year, making the double downgrade by both agencies a lower probability event. We do, however, expect a downgrade by both before June of next year unless we see significant alterations in policy and the local economic forecasts.  
For each of the above outcomes the market would react differently. By far, the worst outcome would be if both S&amp;P and Moody’s cut the local currency rating to sub-investment grade. South Africa would then fall out of the WGBI and the funds tracking this index as a benchmark would become forced sellers.
The magnitude of this forced selling is difficult to determine, but could be as high as $8 billion (R112 billion at R14.00 exchange rate).  While we believe that most yield reaction of the downgrade to junk has already occurred, we would not be surprised if the benchmark R186 Government Bonds experiences a further sharp selloff to 9.85% or even higher over the short-term.
Historically, yields have recovered in the weeks and months post a downgrade to junk status and it is likely that we would see a similar effect. What could hamper this, however, is the political and policy uncertainty that is likely to remain until the budget next year February.
A short-term relief rally of 25 basis points or so would, however, probably materialise if we retain our position in the WGBI post the ratings release on 24 November.
Over the medium-term, the primary factor determining where our yields settle will be the global backdrop and the risk on/off appetite. South African rates have benefited from the search for yield that was exacerbated by quantitative easing (QE) policies that followed the global financial crisis. The risk is that the unwind or tapering of the QE could disrupt the inflows.
Given that South African bonds currently yield in excess of CPI +5%, we at Ashburton Investments remain fairly constructive on bonds for as long as global inflation remains under control and central banks globally taper their buying programs very gradually.

SA’s $8bn problem if local debt is downgraded

By Mike van der Westhuizen, Portfolio Manager, Citadel
During his 2017 Medium Term Budget Policy Statement (MTBPS), Finance Minister Malusi Gigaba, announced figures that surprised even the most bearish of forecasters. Although some fiscal slippage was widely expected, it was the frank transparency with which he delivered his speech that sent the market into panic. There were few positives for him to hide behind.
A tax shortfall of R50.8bn for the 2017/18 fiscal year would translate into a budget deficit of 4.3% of GDP, a 1.2 percentage point slippage on the figures announced in Pravin Gordhan’s last budget speech in February. With limited room to cut expenditure and little talk of additional revenue measures, for now funding this deficit will need to be done through the issuance of more government debt.
In the February Budget, Treasury had aimed to stabilise the debt to GDP ratio at 52.9% by the end of fiscal year 2018/19, but this was revised upwards significantly in the MTBPS to 59.7% in FY2020/21, with the acknowledgement that it could rise above 60% in 2022. Compare this to Moody’s and S&amp;P forecasts which had expected government debt ratios to peak at 53% and 54.9%, respectively over the medium term expenditure framework.
South Africa’s downgrading is no longer an “if” but a “when”. Both S&amp;P and Moody’s have reviews scheduled for 24 November and, while their recent rhetoric has pointed to a wait-and-see until after the ANC elective conference approach, it would not be surprising to see at least one of them pull the trigger sooner rather than later. However, more likely, we could see South Africa’s local currency bond rating be put on review for a downgrade on 24 November, in which case the rating agency has 60 to 90 days to make the move, a period which covers both the ANC elective conference and February 2018 budget. In any case, the negative outlook from the prior downgrade (S&amp;P on 3 April 2017 and Moody’s on 9 June 2017) needs to be resolved within 12 to 18 months, so a downgrade before the end of the first half of 2018 is inevitable.
As we head towards the December ANC elective conference the presidential race is wide open between the two front runners, Nkosazana Dlamini-Zuma (NDZ) and current deputy president Cyril Ramaphosa (CR17 as he has been dubbed). Without further clarity on who will next lead the ANC, the markets wait with bated breath. CR17 would be seen as the more market friendly candidate, while NDZ would be viewed as just an extension of the current president Zuma regime. With these two factions supposedly forming a rift in the ANC ranks, there is a slim chance that a compromise candidate could sneak in at the last minute.
Making a call on market reaction to either of the above two events is almost as difficult as predicting the outcomes of the events themselves. On the downgrade front, it can be argued that since the MTBPS the currency and bond markets have already priced in an imminent downgrade. Naturally the market could overreact to a confirmation that South Africa is officially sub-investment grade. In addition, if one was to factor in potential bond index exclusion from further downgrades, a large portion of the wall of money that has flowed into South Africa can just as quickly exit. This would almost certainly lead to further bond and currency weakness. On the other hand, we could see some short-term respite if the ratings agencies delay the fate.
On the political front, the market outcome could be seen as almost binary. A CR17 win could see a rally in the rand, bonds and SA facing equities, with arguably stronger reaction should the victory include a unified National Executive Committee (NEC). An NDZ win would spark the opposite, and it could be argued that the market has already priced in this status quo scenario to some extent.
Looking past the upcoming uncertainty, another wave of uncertainty will come unless bold steps are taken. The bottom line is that South Africa needs pro-growth economic policy that is ACTUALLY implemented and not just a regurgitation of a “wish list”. This would help to bolster the budget and the economy by sparking stronger revenue growth, purely from a resurgence in business and consumer confidence. Solve the low growth trap and a lot of other things fall into place. Regardless of what happens in late November and December, the road will remain bumpy until there is a unified ruling party. In the current politically sensitive landscape, real change looks unlikely for the time being.

South Africa’s downgrading is no longer an “if” but a “when” – Citadel

Jameel Ahmad | FXTM
The rand has spent the last two weeks riding alternating waves of political uncertainty and weakening economic sentiment. Wednesday’s speech by Malusi Gigaba left the emerging market currency open to steep losses against the greenback following a downwards revision of economic growth from 1.3% to 0.7%, writes FXTM’s Global Head of Currency Strategy and Market Research, Jameel Ahmad.
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The financial markets perceived Gigaba’s maiden budget statement as very negative. The new Finance Minister slashed GDP forecasts and announced that the treasury would increase international borrowing. His speech sent the rand tumbling against all major currencies on Wednesday afternoon, and ZAR was testing R13.9915 – its lowest intraday level since December 2016 – within hours of the announcement. The Rand has continued to encounter selling pressure in the aftermath of the budget statement, with the USDZAR touching a new 2017 high, above 14.20 just one day following the budget statement.
This latest blow is ill-timed, coming hot on the heels of a particularly tumultuous week. An unexpected cabinet reshuffle last Tuesday wiped 0.5% from the currency within minutes of the news breaking. Selling pressure was not initially severe, which suggested political risk premium had already been priced in the Rand and provided some support to the currency. However, this confidence did not last long, as speculation mounted that President Zuma was considering dismissing his deputy, Cyril Ramaphosa.
The negative headlines surrounding South Africa are encouraging investors to price risk premium back into the Rand. However, the fortunes of the currency have not been helped by a recovery in momentum of the US Dollar. In the wake of an unexpected cabinet restructure and a “brutally honest” mid-term budget, investors will be watching to see how the rand performs as the ANC elective conference approaches at the end of 2017. The decline in GDP per capita over the last two years, coupled with a soaring unemployment rate, is likely to weigh heavily on the ZAR, and investor focus on economic data will likely intensify as a result of the budget statement this week.
The aftermath of last week’s selling pressure does suggest the rand is still sensitive to political risk, but domestic politics is unlikely to be the only factor weighing it down. The greenback concluded last week on a high, rallying on news that the US Senate had passed key legislation that would allow President Trump’s Republicans to push ahead with promised tax reforms. A widening spread between Japanese and US government bonds also prompted a sharp rise in USDJPY last week, suggesting that the rand’s fall was not solely down to internal political machination.
For regular market updates and commentary, follow Jameel on Twitter <a href="https://twitter.com/Jameel_FXTM">@Jameel_FXTM</a>

South African Rand Under Selling Pressure After a Troubling Week

Fitch Ratings-Hong Kong/London-26 October 2017: South Africa&#8217;s (BB+/Stable) Medium-Term Budget Policy Statement (MTBPS) projects a sharp fall in fiscal revenue, but has no measures to contain the impact on deficits and debt, Fitch Ratings says. This suggests that the change in direction of policy making away from a focus on fiscal consolidation that we anticipated as a consequence of March&#8217;s cabinet reshuffle is under way and occurring faster than we had expected.
<a href="http://cnbc.africa/category/insights/budget-day/mtbps-2017/">Click here for more on MTBPS</a>
Wednesday&#8217;s MTBPS is the first major fiscal announcement since Malusi Gigaba was appointed Finance Minister in March. The government no longer forecasts stabilising debt, having raised its forecast for gross loan debt (its measure of consolidated government debt) to 58.2% of GDP for the financial year to end-March 2020 (FY19/20) from 52.4% previously. It expects a further rise to 60.8% by FY21/22.
This reflects large upward revisions in the Treasury&#8217;s consolidated government deficit forecast, to 4.3% of GDP (1.2pp wider than in the February budget) this year with only a moderate improvement to 3.9% next year and no further reduction in the two following years. Previously, the government had projected a decline to 2.6% in FY19/20.
The revisions reflect significant revenue shortfalls, of ZAR50.8 billion (1.1% of GDP) in FY17/18, as a result of lower GDP growth (now predicted to be 0.7% in 2017, down from 1.3% in the budget) and lower-than-expected tax buoyancy (the increase in tax revenues for a given increase in GDP). The government&#8217;s GDP growth forecasts are now in line with or lower than Fitch&#8217;s. However, there remains a substantial risk of additional revenue slippage if tax buoyancy fails to recover.
The MTBPS also raises questions about the role of the non-interest expenditure ceiling as a key fiscal policy anchor. The statement predicts that spending will exceed the ceiling set in February&#8217;s budget by ZAR4 billion in FY17/18, driven by the recapitalisation of South African Airways and South African Post Office. The amount is small at 0.1% of GDP, and the government is looking for ways to make the recapitalisation revenue-neutral so that a breach of the ceiling could still be avoided. But the fact that a breach is included in official projections points to a significant loss of credibility for this policy tool.
There are substantial risks to the ceiling from the expenditure side. Public-sector wage negotiations are under way, with a large divergence between trade union demands and MTBPS wage bill projections. The government also noted that capital injections for other state-owned enterprises (SOEs) are likely as profitability has declined sharply and lenders are reluctant to roll over maturing debt, but these are not included in fiscal projections.
The SOEs most likely to require injections, such as Denel, South African Express and the South African Broadcasting Corporation, are relatively small and the fiscal impact would be limited. But the document also points to a risk that Eskom, which holds much larger debt of 9.3% of GDP, may require renewed injections if stabilisation measures do not materialise. Gigaba emphasised that a nuclear power programme is not affordable, but the appointment of a new energy minister last week may signal a desire on the part of the government to accelerate a programme.
Proposals to shore up the public finances are being considered by a team of cabinet ministers, with measures to be announced in next year&#8217;s budget. But the fact that no agreement on consolidation measures or even headline targets for revenue increases were included in the MTBPS highlights how disagreements in the ANC have made it difficult to agree on savings measures.
We think that divisions in the ANC will persist beyond the party&#8217;s electoral conference in December, and it is not clear that the political environment will become more conducive to consolidation. The government also seems increasingly concerned that fiscal tightening measures might dent GDP growth and undermine efforts to rein in deficits.

Fitch_Flickr

Fitch warns that MTBPS suggests policy shifts to occur much faster than expected

By: Monique Vanek
In a press conference with media ahead of the release of the Medium Term Budget Policy framework, South Africa’s Finance Minister Malusi Gigaba said it aimed to be as candid as possible about the dire situation South Africa finds itself in. Below are the highlights.
<div id="attachment_122717" style="width: 693px" class="wp-caption aligncenter"><img loading="lazy" decoding="async" aria-describedby="caption-attachment-122717" class="wp-image-122717 size-full" src="http://cnbc.africa/wp-content/uploads/2017/05/Gigaba2_Flickr-e1495621373543.jpg" alt="" width="683" height="496" />Photo: Flickr.</div>
Economic outlook is dire
<ul>
<li>2017 Economic growth revised downwards from 1.3% to 0.7%.</li>
<li>Growth expected to reach 1.9% in 2020.</li>
<li>GDP per capita has declined for two consecutive years.</li>
<li>95% of our wealth is in the hands of 10% of the population.</li>
<li>SA has twin challenge of growing economy &amp; ensuring inclusiveness.</li>
<li>SA’s expenditure ceiling could be breached by R3.9bn this year, mainly as a result of government’s recapitalisation of South African Airways and the South African Post Office. Government is considering the disposal of assets to offset this.</li>
<li>In 2016, gross fixed capital investment declined by 3.9%, with large decreases in mining and manufacturing.</li>
<li>Capital investment is expected to decline by 0.6% in the current year.</li>
<li>Government debt held by non-residents has risen from 4.4% of GDP in 2007 to 17.6% of GDP in 2017. A sharply negative shift in global investor sentiment towards South Africa could result in large capital outflows, with highly destabilising consequences for the economy.</li>
<li>Per capita income expected to continue to stagnate in the years ahead</li>
<li>The consolidated budget deficit will widen to 4.3% of GDP in 2017/18, against a 2017 Budget target of 3.1 per cent of GDP.</li>
<li>Gross national debt is projected to reach over 60% of GDP by 2022, with debt service costs reaching 15% of main budget revenue by 2020/21.</li>
<li>Aims to kick-start inclusive growth by implementing the 14 measures announced by Gigaba in June.</li>
<li>A presidential task team is considering a range of steps to bring the public finances back onto a sustainable path.</li>
<li>Growth must be characterised by radical economic transformation.</li>
</ul>
Asset registry to be created
<ul>
<li>Government plans to have a full asset registry available by March 2018 of non- and core assets that it can disposed of to ensure it does not breach its expenditure ceiling</li>
<li>Government is still considering whether to sell its stake in Telkom</li>
</ul>
Tax revenue shortfall 
<ul>
<li>Gross tax revenue for the 2017/18 – 2019/20 period is projected to fall short of the 2017 Budget estimates by R209 billion.</li>
<li>Tax revenue projected to fall short of the 2017 Budget estimate by R50.8 billion in the current year</li>
</ul>
Tax changes
<ul>
<li>Cabinet has approved the release of the carbon tax bill to Parliament</li>
<li>Treasury to relook at medical tax credits</li>
</ul>
Tax revenue and administration
<ul>
<li>Government is noting slippage in tax compliance</li>
<li>SARS working with FIC &amp; SARB to close tax gaps</li>
<li>SARS, FIC &amp; SARB’s ability to combat cyber-crime must be enhanced</li>
<li>Treasury engaging with SARS on Tax Ombud recommendations relating to tax refunds.</li>
</ul>
Spending priorities 
<ul>
<li>The public sector will spend more than R300 billion each year on infrastructure, with about half of this funded directly from the budget.</li>
<li>Lion’s share of economic infrastructure will be provided by State Owned Companies;</li>
<li>Municipalities spending is projected to be R197bn</li>
<li>Provinces are anticipated to spend R208bn over 3yrs</li>
<li>Education sector expected to spend R44bn</li>
<li>Cabinet approved Budget Facility for Infrastructure</li>
<li>Department of Planning, Monitoring &amp; Evaluation has prepared a mandate paper</li>
<li>Government will protect spending on core social programmes that benefit poor</li>
<li>Over next 3yrs consolidated spending will increase by 7.3% to R1.9trn in 2020/21</li>
<li>Community development, learning, culture &amp; health are the fastest-growing functions</li>
<li>No academic deserving student must be excluded due to financial constraints; more in budget 2018</li>
</ul>
 
Stabilising and revitalising state-owned companies
<ul>
<li>The trend of SOCs seeking bailouts to finance operational expenditure, inefficiency and waste must end</li>
<li>Proposals to be made to make Govt guarantee framework more stringent</li>
<li>Retaining a national carrier is in the public interest</li>
<li>A strategic partner is still on the agenda for SAA</li>
<li>Eskom’s governance issues are a major concern</li>
<li>National Treasury to work with DPE to strengthen governance at Eskom</li>
<li>New board for Eskom before the end of November</li>
</ul>
&nbsp;
&nbsp;

SA’s Medium-term budget highlights

By: Aviwe Mtila
South Africa is unlikely to achieve its National Development Plan goals and some programmes may have to be cut to meet unanticipated spending pressures.
<img loading="lazy" decoding="async" class="aligncenter wp-image-41719 size-full" src="http://cnbc.africa/wp-content/uploads/2017/02/cape_town_-_pixabay.jpg" alt="Britain warns of possible terrorist attacks in South Africa" width="960" height="633" />
This is contained in the Medium Term Budget Policy Statement (MTBPS), delivered by the country’s Finance Minister, Malusi Gigaba, in Cape Town this afternoon.
The National Development Plan (NDP) was developed five years ago and culminated in a long term vision for South Africa, Vision 2030, which spelled out what was required to realize the country’s aspirations.
Among other goals, the NDP set out to grow the economy by 5.4 per cent yearly, and bring unemployment down to 6 per cent by 2030. At present, South Africa’s unemployment rate sits at 27 per cent.
The Finance Minister spearheaded his MTBPS by passionately giving a background on the NDP. Interestingly the actual MTBPS, seen by journalists’ hours before the minister’s speech, raises concerns about the NDP not being achieve because of the country’s current economic trends.
“It was absolutely critical for Vision 2030, which spelled out what was required to realize our aspirations for our society, and for all who live in it. That is what government is about, and that is what development is also about – putting in place the conditions for the people to realize their aspirations for themselves,” says Gigaba.
The MTBPS also notes that there will be no additional funds available to increase baseline expenditure over the 2018 Budge
<img loading="lazy" decoding="async" class="aligncenter wp-image-288430 size-full" src="http://cnbc.africa/wp-content/uploads/2017/10/Aviwe_03.png" alt="" width="948" height="492" />
As the country’s economic outlook takes a turn for the worst, with the GDP contracting by 0.7 in the first quarter of 2017, a stronger economic growth is required to return the public finances to a sustainable position. This will put South Africa back on a path of rising employment and increasing prosperity states the MTBPS.

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