The tabling of the February 2021 Budget Review is an important event to monitor next week. In contrast to the June 2020 Supplementary Budget and October 2021 MTBPS (both of which emphasized the risk of an unsustainable rise in the debt trajectory against a background of weak growth, a high wage bill, and low revenue receipts), the revenue outcome appears to be significantly better. The windfall in revenue receipts and pre-funding provides the Minister of Finance with a rare opportunity to make a meaningful dent in the rising debt trajectory. The increase in cash balances could facilitate a reduction in bond issuance in the new fiscal year, which would moderate the increase in debt servicing costs. Our MTEF forecast suggests that this could narrow the primary budget deficit to 1.1% of GDP in F23/24, which is marginally better than the MTBPS forecast of 1.3% of GDP. The gross debt to GDP trajectory has the potential of being revised lower to ~91.0% of GDP by F23/24 vs the MTBPS forecast of 92.9%. This positive trajectory effect is important if National Treasury’s credibility is to be restored and further sovereign downgrades are to be avoided.

Key issues we are watching:

• The size of the revenue overrun in FY20/21;
• The increase and composition of spending in F21/22 in the context of political dynamics;
• Bond supply in F21/22 and the MTEF period
• The strategy on SOE standardization and further bailouts, in view of outcomes exceeding forecasts.
• The primary balance deficit and gross debt-to-GDP trajectory over the MTEF period. 

F20/21 dynamics – Revenue receipt surprise:

The key surprise in F20/21 is a significant overrun in revenue receipts relative to the June 2020 Supplementary Budget and the October 2020 MTBPS shortfall of R300.1bn. Median expectations are looking for an overrun of R100bn. ICIB has pencilled in R85bn.

Notwithstanding the deep contraction in economic growth, estimated at 7.3% in 2021, tax buoyancy remained strong. This could see the revenue undershoot amounting to ~R200bn as opposed to the forecast of R300bn. We forecast CIT to be R30bn ahead of target, PIT +R25bn, and VAT +R30bn. The reasons for the high tax buoyancy can be ascribed to the following:

•  External factors such as a surge in commodity prices, which raised the tax contribution of mining companies to the fiscus by R30bn to R40bn;
•  Domestic VAT that received a boost from durable good sales with volumes returning to pre-Covid levels in Q4 20 and the effect of the weaker rand on imports
• The effects of the rise in unemployment and decline in bonuses have affected PAYE less negatively than expected; tax payments on retrenchment packages have provided a further offset.
• Most of the other tax components have also performed better than the MTBPS forecast, which suggests that the forecast was conservative on account of the high level of uncertainty and volatility risk associated with the supply- and demand-supply shock to the economy.

Tax increase in F21/22: It would be prudent for government to refrain from raising taxes by the amount of R5.0bn that was penciled into the forecast for F21/22. With regards to the Covid-19 vaccine, there have been suggestions of a solidarity tax to finance the cost. ICIB is of the view that the windfall from mining taxes can be redirected to cover the additional expenditure at a time when consumer confidence remains fragile. 

What we are watching in F21/22: The ability of National Treasury to contain spending is the key issue in the context of demand from funds from various constituencies. These include the cost of the COVID-19 vaccine, a further bailout of R7.5bn to the Land Bank, and R0.5bn to Denel. We think that the expenditure forecast will again be shrouded with a high level of uncertainty which is related to the public sector wage bill and further SOE bailouts. Both these issues, which are highly politically motivated, were referred to in the letter of intent to the IMF when the COVID-19 loan of $4.3bn was signed off. The October 2020 MTBPS has penciled in an increase of 0.8% in the wage bill over the MTEF period, which covers the next three years of the multi-year wage agreement, with negotiations in progress. The first year (which is F21/22) has factored in a wage freeze, followed by increases of 1.2% and 1.3% in the outer years.  Transfers to SOE’s, where upside forecast risk has persistently materialized in the past, remains a major concern. In F20/21, the additional transfer of R10.5bn to SAA was countered by a reduction in transfers to local authorities and other departments, in order to be budget neutral. 

Main budget deficit and funding

The revenue overrun in F20/21 should go some way to reduce the size of the main budget deficit. We expect the MTBPS forecast of 14.6% of GDP to come in at 12.9% and F21/22 to shrink from 10.1% to 9.7%. The lower main budget deficit and pre-funding arising from strong demand from non-competitive bond auctions could see an increase in the closing cash balance of ~R120.0bn. This in turn could lower the net amount of T-bills raised and the size of the weekly bond auctions. We have penciled in a net increase in T-bill issuance of R60.0bn compared to the MTBPS forecast of R67.0bn. The size of the weekly bond auctions could also be lowered by R1.0bn from R8.6bn to R7.6bn; a larger reduction is possible if there is a larger drawdown on cash balances and/or a larger increase in net T-bill issuance.