When South Africa’s new Finance Minister Enoch Godongwana delivers his first Medium-Term Budget Policy Statement (MTBPS) on November 11, 2021, he will need to focus on business-friendly policies that stimulate sustainable economic growth to ensure that South Africa Avoid fiscal hardship for the next two to three years, according to wealth management experts Citadel.
Citadel chief economist Maarten Ackerman says all eyes will be on Godongwana to see if he maintains the more economically prudent policies of his predecessor Tito Mboweni that were designed to stimulate business growth, grow the treasury and create jobs.
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MTBPS should prioritize economic growth policies to lift South Africa out of its debt spiral
However, Ackerman does not expect Godongwana to make big changes to existing budget policies. “Looking at where we are right now, we don’t really see any big announcements about fiscal changes or any other policy changes, so it’s more likely an update and an indication of what to expect when the National Budget Speech is delivered in February, ”says Ackerman.
Citadel Chief Investment Officer George Herman agrees: “MTBPS is often more about politics than essential numbers, but it tells the market where the ruling party is taking our finances.”
Ackerman notes that the South African economy recovered more positively over the past year than expected or budgeted in the February National Budget, in part thanks to the reopening of the global economy that supports strong exports from the local agricultural and commodity sectors. .
“This does not mean that we are out of the woods yet, it just looks a lot better compared to the worst of the pandemic. What is expected to be seen is whether the minister is going to be prudent and take this opportunity to ‘deposit’ some of the benefits that we have seen, because we are still in a very tight fiscal position and, if we do not get the economy going very soon, it is We may have more fiscal challenges in the next two to three years, ”Ackerman says.
The balancing act
Godongwana will need to balance the provision of sufficient support for the policy elements that drive long-term sustainable economic growth, such as those that strengthen stable electricity supply, port restructuring, industrial development, and eliminate any bureaucracy that affects the ease of access. do business. while carefully managing policies aimed at closing South Africa’s inequality gap, such as social support, minimum wage and proposed national health insurance.
Says Ackerman: “But that’s where the problem lies: if we don’t get the economy to work in the next two or three years, it will be very difficult to remove that social support and if we don’t get more tax revenue from a faster growing economy we will need to ask borrowed even more. About 20% of South Africa’s tax revenue is already used for debt service, so the long-term risk of a very bleak fiscal environment remains if we do not urgently strengthen the economy and broaden the tax base. ”
Herman agrees: “The revenue figures for 2021 are likely to exceed the February national budget figures by something in the region of 120 billion rand. Unfortunately, the government has already started spending this, which is exactly where the uncertainty lies. There are several important social commitments at stake and the question is: How permanent will part of this welfare spending become?‘”
Debt / gross domestic product (GDP) ratio
Herman says that South Africa’s debt-to-GDP ratio does not appear to stabilize at any point in the medium-term horizon. “Despite adjusting downward thanks to the new larger value of GDP, the debt-to-GDP ratio is now increasing again.”
Focusing on bond yields in the capital markets, Herman believes that these are attractively priced relative to fair value, which seems to indicate that the markets have valued some risk factor and uncertainty surrounding the MTPBS. “Therefore, I do not expect any impact to the bond market from the budget in the medium term.” However, there was always the risk that if something in the medium-term budget were to ignite some kind of panic, foreign investors who have been consistent sellers of South African bonds could be incentivized to sell South African bonds again. If this happened, the rand would be more negatively affected by the MTBPS.
Maarten Ackerman, chief economist, and George Herman, chief investment officer at Citadel.