Morning Brief – Cool, but how?

Cool, but how?

If you want the simplest of summaries to yesterday’s budget speech in South Africa then read no further than the title. Tito Mboweni mostly said the right things as he laid the budget before the nation yesterday. The one thing he missed out was how!? What the review promised was more parsimonious compensation for government workers. We learned how much the Treasury expected to save and therefore the support it would provide to efforts of fiscal sustainability. What was missing is how they’re going to achieve such cuts, limiting the positive impact the announcement had on the Rand yesterday.

As with any budget review the Minister opened by painting the scene. With broad strokes the image that emerged wasn’t pretty. The biggest deficit in 28 years was the conclusion. Not a good start!

A deficit of 6.8% is forecast for 2021 facilitated by shrinking economic output (GDP) meaning that any shortfall in spending is exaggerated in percentage terms versus the size of the economy. The 2021 forecast deficit is the largest hole in South Africa’s coffers since 1982/3 when the figure soared to 7.2%. European readers living under the harsh constraints of the ECB’s six-pack of fiscal rules legally limiting their budget deficits to 3% upon threat of Billions of Euro’s of fines must be surprised at South Africa’s forecast.

Kicking off with such dire news the Minister was on the back foot to placate markets who were chomping at the bit to sell the South African currency. And so the Treasury delivered:

To contain the budget deficit and move towards debt stabilization, the 2020 budget proposes a significant reduction in government expenditure growth, mainly as a result of lower growth in the public-service wage bill.

The long and short of it is nominal spending is forecast to be down 2.7% for this year and 3.3% for two years after that. The big question: will that outweigh the burden placed on the nation by the debt of Eskom. The big answer: NO! And the Rand’s price action yesterday reflected a discount in domestic assets still representing the headache that the state owned utility creates. With fear around the Coronavirus intensifying, Rand trading was overwhelmed in the latter half of Wednesday’s session by a broader emerging market sell-off. Whilst the pattern emerging in the global infection rate is motivating risk decisions, Trump’s admonitions regarding infection on the continent of North America jolted markets. The President offered an hour long press conference yesterday afternoon on the subject, appointing Vice President Mike Pence as the man in command of coordination.

Markets will now turn their focus to Moody’s for any indication on the path of South Africa’s sovereign debt rating. The rating decision will arrive in one months’ time and global risk factors as well as details on the implementation of Tito Mboweni’s cost-cutting plan will be pivotal to predicting the Rand’s movements.

Discussion and Analysis by Charles Porter

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