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The Minister of Finance tables the February 2022 Budget Review on Wednesday, 23 February. The context is President Ramaphosa’s State of the Nation Address (SONA) 2022 that opened the door to deal with the obstacles to a higher growth trajectory more proactively. The premise is a comprehensive social compact, to be announced in 100 days, embedded in the Economic Recovery and Reconstruction plan (ERRP).
Key factors we are watching:• The size of the revenue overrun in FY21/22
• The increase and composition of spending in F22/23 in the context of normalisation in economic activity
• The primary balance deficit and gross debt-to-GDP trajectory over the MTEF period
• More details on lifting blockages in the economy
• Bond supply in F22/23
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Will the budget bring gloom or boom?
Jeremy Maggs talks to Investec's Annabel Bishop (chief economist), Tertia Jacobs (treasury economist), Rene van Zyl (tax and fiduciary expert) and Ayan Ghosh (investment strategist) about their predictions for Budget Speech 2022.
Macro-economic forecast: The elephants in the room
The President’s initiatives to deal with obstacles announced by the SONA are unlikely to be incorporated in National Treasury’s MTEF macro economic forecast. The 2021 real GDP growth forecast is expected to be revised from 5.1% to be more in line with Bloomberg consensus of 4.8%, with at best marginal changes to the forecasts of 1.8%, 1.6% and 1.7% for 2022, 2023 and 2024. The CPI inflation forecast for 2022 of 4.2% is well below ICIB’s and Bloomberg consensus of 4.9%.
To give credence to this, the Minister of Finance should provide more detail and hopefully a timeline, to the following matters:
SOEs: The poor financial and operational performance of many of the SOEs remains a significant risk to government finance, through its exposure to contingent liabilities. Public institutions utilised R410.3bn out of total guarantees of R581.0bn by end March 2021. National Treasury has taken steps to reduce the risk to the fiscus by announcing that guarantees will only be issued when an SOE can demonstrate its ability to service its debt.
However, Denel received an additional guarantee of R2.9bn and settled an interest payment in February after being suspended from the JSE for non-payment. The President stated in the SONA that to ensure that SOEs are effectively fulfilling their responsibilities, the Presidential SOE Council is preparing recommendations on SOEs to be retained, consolidated or disposed of. Debt redemptions of SOEs in F23/24 are elevated, at R83bn.
A decision on e-tolls on the Gauteng Freeway Improvement Project (GFIP) is expected. A scrapping of e-tolls could require a capital transfer to Sanral and an increase in the fuel levy to finance the loss of income out of a national pool of funds.
Infrastructure plan: An infrastructure-led recovery is at the centre of driving the revival in economic growth. But there have been few shovel-ready projects, with the development of a pipeline of projects held back by capacity and coordination constraints in all spheres of government. With the Infrastructure Fund in place, managed by the DBSA, the focus has shifted to progress made in public-private partnerships (PPPs). The regulatory backdrop is a further obstacle in introducing more dynamism in PPPs. We will be looking for more developments on this front.
Cutting of red tape: The appointment of a “red tape team” in the President’s office has a critical job in removing some of the specific obstacles to investment and business growth. Will there be any priorities to reform announced for the year ahead?
Fiscal consolidation over the MTEF period
As is always the case with the February Budget Reviews, unresolved issues tend to get addressed in the following appropriation budget or rolled over until the next fiscal year. The latter is about political-sensitive issues (public sector wages or policy issues such as the SRD grant). The implications are that spending forecasts are subject to high variance and challenge the budget forecast’s credibility over the MTEF period.
The issues that will remain unresolved in the F22/23 expenditure forecast are the following:
• The increase in the public sector wage bill: National Treasury has carried over the cash bonus of ~R20bn instead of a cost of living adjustment (COLA) in F20/21. This will remain in place until an agreement has been reached about an annual increase in COLA. The issues are whether the gratuity will stay in place and continue to be paid over and above a COLA increase. Further, the constitutional court ruling on the zero increase in 2020, challenged by trade unions and amounting to R37bn, remains outstanding.
• Extension of the SRD grant for a further 12 months to March 2023: The cost of the SRD is estimated at ~R45bn or 0.6% of GDP. However, this is widely expected to be replaced by a permanent income transfer in the coming years. We doubt whether National Treasury could pencil in any amounts over the MTEF period. The discussion document indicates this has to be funded from a permanent source of income, such as an increase in VAT.
Composition of spending: The spending mix is likely to continue to shift towards higher current spending levels relative to capital. The social wage is forecast to rise to ~64% of main non-interest expenditure, slightly less than a peak of 67.5% in F20/21. The current fiscal year has seen 53.7% of the capex budget allocated during the first nine months of the fiscal year (marginally better than 47.9% in the previous fiscal year).
Marginal improvement expected in debt trajectory: Gross debt/ GDP ratio could decline over the MTEF period: The decline in domestic bonds issued (see the section below) could help to lower the debt trajectory over the MTEF period by ~3.0% to 75 of GDP (MTBPS forecast 77.8% of GDP).
The estimated revenue overrun of R45bn in F21/22, combined with potential underspending of R10bn, could reduce the size of the main budget deficit from R409.9bn (6.0% of GDP) to R349.9bn (5.5% of GDP).
Main budget deficit and funding
The better-than-expected revenue performance has allowed National Treasury to lower the net increase in T-bill issuance to zero (February 2021 forecast of R9.0bn) and domestic bond issuance to R285bn (previously R380bn). It is possible that cash raised from the issuance of domestic bonds could come in marginally below the forecast.
This can primarily be ascribed to a meaningfully lower takeup of non-competitive bond auctions. We estimate additional financing from this source at R53.0bn compared to R172.1bn in the previous fiscal year. The lower pace of funding has been an important contributor in lowering the gross debt-to-GDP ratio from an estimated 69.9% of GDP to ~69.0%.
In F22/23, the estimated gross borrowing requirement is expected to decline to R447.0bn (MTBPS R493.3bn).
The reasons for this are a higher opening cash balance and a decrease in the outstanding amount of R2023s from R97.3bn to R75.0bn. We think that FRNs could become part of the funding mix.
Depending on the size of issuance (which we have not estimated), we forecast a net increase in T-bills of R45.0bn (with downside risk) and domestic bond supply of R300bn (R381.8bn) with downside risk.
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