The MTBPS delivered for the markets, with no surprises

By: Mokgatla Madisha, Head of Fixed Interest at Sanlam Investments

Finance Minister, Enoch Godongwana, delivered his first Medium Term Budget Policy Statement (MTPBS) on 11 November 2021.

Unlike policy statements of the recent past, the market was primed for positive surprises. After all, monthly tax collection data pointed to a large revenue overrun relative to the February 2021 budget. Moreover, with growth rebounding stronger than expected, this should have been a relatively easy policy statement to deliver. But…

The theme of last year’s statement and the February budget was ‘Fiscal consolidation and Growth’. When the minister was first introduced to the investment community, he was at pains to point out that he has been head of the ANC economic policy unit for many years and that indeed he has been involved in the budgeting process and that he and the Director-General Dondo Mogajane, know each other well, having previously worked together and therefore we should expect policy continuity.

Did he deliver?

Just before the minister started his speech, the rand was trading R15.26 against the dollar, and the benchmark 5-year government bond, R186, yielded 8.07%.

At 16:15, allowing for some time to digest its contents and implications, the rand was unchanged at 15.26, but bonds had rallied across the curve. The R186 was 11bps firmer at 7.96%, while the 10-year R2032 bond was also 15bps firmer at 9.72%.

It is fair to say that going into this budget, expectations were high that the minister would deliver a positive budget because of the revenue overrun, so the opportunity to disappoint was certainly there. The market reaction suggests that the minister delivered on expectation and may have slightly outperformed.

Under former Finance Minister Tito Mboweni, consolidation meant reducing the share of the budget spent on wages by allowing the wage bill and social grants to grow below the inflation rate while maintaining expenditure on infrastructure spending.

On this score, Minister Godongwana has delivered.

After allowing for the increased extension of the covid relief grant this year, social grants are projected to fall from 3.6% of GDP to 3.07% of GDP in the fiscal year 2024/25. We had expected this line item to be maintained at about 3,5% of GDP on account of higher unemployment. On the wage bill, the R20.5billion gratuity for public servants will be funded by a one-time reprioritization away from the infrastructure fund, with an unchanged projection of increases in the wage bill of 1.5% per year. There is a note of caution here: there is pressure to increase support to those who are not currently receiving grants, increase the child support grant for orphans, and introduce a new grant once the Covid grant ends in March 2022. A decision has yet to be made by the government on whether any of these grants are affordable within the current fiscal context. On this last point, Minister Godongwana was at pains to point out that this will be a government decision, not a National Treasury decision. I thought this was a nice touch, as it helps protect Treasury from undue criticism.

How is the revenue windfall being spent?

Treasury expects revenues to surpass February 2021 budget estimates by about R120 billion. This number is in line with what private-sector economists have been projecting. Expenditure during this fiscal year is R59 billion higher than February 2021 projections, mainly due to the extension of the Covid grant, public sector wage agreement and an allocation to SASRIA to enable it to pay the claims from the June 2021 riots.

The extra revenue from high commodity prices is seen as transitory and is being used largely to reduce debt. The Debt to GDP ratio is projected to decline marginally this year to 69.9% from 70.7% before rising to 77.8% in 2024/25, with a peak debt ratio of 78.1% in 2025/26. While this peak is about 10% lower than February 2021 projections, this is largely because Statistics SA revised its estimates for the size of the economy by 11% earlier in the year.

Sanlam Investments view is that we need to see a bigger consolidation effort or much faster economic growth to achieve a stabilisation of the debt ratio.

On the growth front, the MTBPS offered very little in new thinking. Instead, there was a rehash of the same promise to accelerate structural reforms. Revised target dates were offered for the release of the spectrum and the implementation of an eVisa system. Third-party access to Transnet rail infrastructure will be implemented by the end of 2022. National Treasury projects real GDP growth of between 1.6% and 1.8%; while this is in line with the decline in potential growth over recent years, such a low level of growth will result in persistently high unemployment.

Funding the deficits

Over the next three years, the borrowing requirement is projected to be R173 billion lower than February 2021 estimates, resulting in similar a decline in long-term domestic loans to be issued. In the current fiscal year, Treasury projects foreign funding of R77 billion up from R46 billion in February 2021. Local issuance will be concentrated in the 3 -to-16-year part of the curve. This announcement contributed to long-dated bond outperforming. However, I think we should not interpret this to mean that there will be significantly less duration coming to the market. The debt redemption profile means Treasury will continue to employ switch auctions (buying short-dated bonds in exchange for longer maturities) to manage rollover risk. However, for now, this was seen as positive.

The MTBPS delivered for the markets by delivering on policy continuity as far as fiscal consolidation is concerned. There were no surprises. Rating agencies are unlikely to change their views on South Africa on the strength of this MTBPS. Low GDP growth results in weak per capita GDP, which is pressuring the credit rating lower. South Africa needs growth and more growth. Hopefully, the February 2022 budget will do better on this front.