ECONOMIC COMMENTARY. Medium Term Budget Policy Statement (MTBPS) Economics South Africa

Transcription

1 ECONOMIC COMMENTARY Economics South Africa 21 October 2015 Medium Term Budget Policy Statement (MTBPS) The MTBPS keeps deficit under control despite the deteriorating economic climate Minister Nene s second MTBPS aims to keep reducing deficits over time by improving spending priorities and efficiencies, cutting wasteful spending and increasing taxes cautiously. Fiscal consolidation is again emphasised as sovereign rating agencies increase their scrutiny and global capital markets become more constrained. Treasury s economic growth estimates have been revised down sharply, with growth expected to be 1,5% in 2015 from 2,0% anticipated at the time of the February 2015 budget and then rising to a still modest 2,8% in 2018/19. Despite the lower growth this year, the expected budget deficit is slightly lower at 3,8% of GDP (previously 3,9%). However, it then falls much more gradually, to 3,3% in 2016/17 (2,6%), 3,2% in 2017/18 (2,5%) and 3,0% in 2018/19. Gross debt is forecast to rise to 49,4% of GDP in 2018/19 from a revised 49,0% in 2015/16 (previously 47,3%). The MTBPS admits to some slippage. The MTBPS looks at government attempts at easing binding constraints on the economy such as energy supply, labour relations and policy as well as instituting long-term reforms that will encourage growth. Group Economic Unit Dennis Dykes DennisD@nedbank.co.za Nicky Weimar NickyWe@nedbank.co.za Isaac Matshego IsaacMat@nedbank.co.za 135 Rivonia Road Campus, 135 Rivonia Road, Sandton, 2196, South Africa Economic background and assumptions Minister Nene s second Medium Term Budget Policy Statement (MTBPS) was again put together in difficult circumstances. The economic climate has deteriorated significantly, with lower growth likely to put pressure on revenue collections and expenditure requirements. At the same time it is becoming more difficult and expensive to raise capital in global markets as the US edges towards interest rate normalisation. Crucially the Minister had to reassure investors as well as the sovereign rating agencies that government finances are still on a path towards a more sustainable fiscal position despite the setbacks in the economy and the difficulties in keeping spending under control. The recent downgrade of Brazil to non-investment grade by Standard and Poor s would have provided a reminder of the severe consequences of moving off this path. The spotlight was therefore once again on the mix and efficacy of government spending, especially following the unfortunate, generous concessions on perks to public servants in the recent round of wage negotiations. The economic assumptions underpinning the fiscal framework were revised down significantly in this MTBPS and are in line with recent private sector expectations. Economic growth in 2015 is now expected to be just 1,5% from 2,0% expected in February and this is forecast to rise to 1,7% in 2016 (from 2,6%), 2,5% in 2017 (from 3,0%) and 2,8% in Growth is expected to be helped by an easing electricity constraint, improving global demand and better business confidence. As a result capital formation and higher exports account for most of the improvement, with weak employment growth explaining the modest rebound in household spending. The current account deficit rises gradually to 4,8% of GDP over the period from the expected 4,1% in 2015.

2 Table 1 : Economic assumptions: calendar years Actual Estimate Forecast Household spending Government spending Gross fixed capital formation Gross domestic expenditure Exports Imports GDP growth GDP inflation Headline CPI inflation Current account (% of GDP) The weaker growth environment implies lower GDP at current prices, the key denominator in fiscal measures. Over the framework period GDP is around 2% lower per annum than that predicted at the time of the budget earlier this year. Table 2 : Budget assumptions: fiscal years 2012/ / / / / / /19 % Actual Estimate Forecast GDP growth GDP inflation Headline CPI inflation GDP at current prices (R billion) Fiscal stance and revised MTBPS Minister Nene s first MTBPS last year was bold in direction and gave assurances that the state would look increasingly to the private sector in helping to deliver infrastructure. There were also strong assurances that wage bill increases would be kept close to inflation and that spending freezes were in place to get public finances on a sounder footing. This year s MTBPS looks less assured, hurt by setbacks to economic growth and an unexpected and unwelcome outcome to the public sector wage negotiations. The budget arithmetic has therefore suffered, with gross public debt now close to the psychologically-important 50% of GDP for much of the period. Although the economic assumptions look realistic, the risks to the outlook remain on the downside given the uncertain global environment as well as poor confidence generated by inconsistent electricity supply and policy vacillations. Treasury s taxation estimates do not look demanding given the assumptions on growth and inflation, but expenditure estimates may look similarly modest if some of government s more ambitious projects such as National Health Insurance or the nuclear programme are implemented. If expenditure rises unexpectedly and structurally, Treasury has made it clear that it would need to raise tax rates in a similar manner. Clearly some of the recommendations of the Davis Tax Committee could provide some of this additional revenue. However, there is a commitment that opportunities to mobilise additional revenue will be explored cautiously given the potentially harmful effects on growth. Economic Commentary 21 October 2015 Page 2 of 6

3 Table 3: Consolidated government fiscal framework Revenue Revenue for 2015/16 at the consolidated level is now expected to be higher than originally budgeted for, due mainly to asset disposals of R25,4 billion. Tax revenue will be slightly lower, hurt by lower than expected corporate taxes and VAT collections, but bolstered by better personal income tax collection following the hikes in marginal tax rates. Over the medium term revenues are lower than that predicted in the budget due to weaker economic growth. The MTBPS provides some update on the work of the Davis Tax Committee and particularly its recent work on corporate tax base erosion through transfer pricing and other practices as well as its work on VAT. On the former Treasury says that initiatives are underway to comprehensively deal with leakages. Nothing has been decided on VAT but it is clear that this would be a definite option to fund additional expenditure if required, given its efficacy. Revenue is projected to reach R1 540,9 billion in 2018/19, easing slightly to 29,3% of GDP from the estimated 29,8% in fiscal 2015/16. Expenditure 2014/ / / / /19 Budget MTBPS Budget MTBPS Budget MTBPS Budget MTBPS MTBPS Feb 2015 Oct 2015 Feb 2015 Oct 2015 Feb 2015 Oct 2015 Feb 2015 Oct 2015 Oct 2015 Revenue (Rbn) % gdp Yoy% Expenditure (Rbn) % gdp Yoy% Balance (Rbn) % gdp GDP (Rbn) Yoy% The MTBPS talks of improving the quantity, quality and composition of spending. However, it is clear that the wage settlement has hurt this goal, setting back efforts to improve the composition of government spending, putting pressure on capital and other critical inputs and leaving little room for other spending priorities over the next three years. The public-sector wage agreement pushes remuneration up by 10,1% this year and by more than two percentage points above inflation in the following two years. Treasury says these are not sustainable without appropriate productivity improvements in the public service. Unfortunately, earlier massive increases in the remuneration bill in the wake of the financial crisis had no such impact, so there is little hope of a different outcome this time around. Treasury does, however, assert that there was a decline in employment at national and provincial levels between 2012 and 2015, which may help offset some of the negative fiscal effects of the package adjustments. In this context the MTBPS emphasises doing more with less. There have been cost-containment measures imposed on departments and procurement procedures have been reformed, with more centralised operations designed to curb corruption. Over the medium term education, social protection, and health are the key priorities. The deficit and financing The main budget net borrowing requirement will be slightly more than originally anticipated at R176,3 billion for 2015/16 compared with the R173,1 billion projected in February. However, medium-term estimates remain high, with the borrowing requirement rising to R186,1 billion in 2018/19. The burden on the bond market will rise over the next three years, mainly because of Economic Commentary 21 October 2015 Page 3 of 6

4 relatively large bond redemptions. Foreign issuance will remain relatively small, designed more to keep a presence in international markets and to meet maturing loans. The US$4,5 billion planned issuance over the medium term is in line with recent levels. Total gross loan debt is forecast to rise from 49,0% of GDP this fiscal year to 49,4% in 2018/19, while total net loan debt is projected to increase from 43,5% of GDP to 45,4% in 2018/19. Table 4 : Main budget and financing 2014/ / / / /19 R million Outcome Budget Revised Medium-term estimates Main budget balance Domestic short-term loans (net) Treasury bills Corporation for Public Deposits Domestic long-term loans (net) Market loans (gross) Loans issued for switches Redemptions Foreign loans (net) Market loans (gross) Redemptions(including revaluation of loans) Change in cash and other balances Financing Other issues Last year s emphasis in the MTBPS to rely more on the private sector for provision of key infrastructure is less stressed in this statement. While government has announced plans for a coal and a gas Independent Power Producer, disappointingly, simple changes to regulations that would encourage electricity generation by private players have not yet been introduced. These would include requiring Eskom to offer longer offtake agreements to projects in the co-generation field as well as opening up the grid to all participants. There was very little detail on government s proposed nuclear deal, except that the costs, benefits and risks of the project had been examined and that R200 million had been budgeted over the medium term to support preparatory work necessary to carry out the procurement. This gives hope that a hasty signing of a massive, unaffordable deal is not in the immediate offing. Similarly there was little on National Health Insurance except to say that it would be phased in by 2025/26 and that a White Paper giving more detail including financing options would be published before the end of the financial year. The MTBPS states that the state has sold R25,4 billion of Vodacom shares to provide R23 billion of equity for Eskom and to provide R2 billion for South Africa s initial capital to the New Development Bank, a BRICS initiative. Lastly, the MTBPS is frank in its acknowledgment of the constraints to economic growth. Some of these are physical such as the energy deficit and these are being addressed, albeit slowly and fewer signals to the private sector than hoped. However, it also lists the unfavourable labour relations and the policy environment as key issues. On labour it refers to a process underway at NEDLAC, although much of the emphasis there has been on implementing a national minimum wage, with very uncertain economic merit in a country with such high unemployment. On the policy front the MTBPS refers to better coordination efforts as well as the imposition of socioeconomic impact assessments on all future policies and regulations. Economic Commentary 21 October 2015 Page 4 of 6

5 Comment and Implications The MTPBS makes a credible attempt at keeping government on the path of fiscal consolidation, while preventing further damage to the economy. However, it is very clear that there is now very little room for manoeuvre and that any increments to future spending plans will have to be very carefully considered. Unfortunately, it is still unclear whether this message has filtered through to all areas of government. Economic Commentary 21 October 2015 Page 5 of 6

6 Disclaimer The information furnished in this report (the report ), which information may include opinions, estimates, indicative rates, terms, price quotations and projections, reflects the existing judgment of the author(s) and the prevailing market conditions as at the date of this report, which judgment and conditions are subject to change without notice, modification or amendment. This report does not necessarily reflect the opinion of Nedbank Limited ( Nedbank ). The information herein has been obtained from various sources, the accuracy and/or completeness of which Nedbank does not guarantee and for which Nedbank accepts no liability. Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration. The information contained in this publication may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute Nedbank s judgment as of the date hereof and are subject to change without any notice. Nedbank and/or its affiliates may make a market in these instruments for our customers and for our own account. Accordingly, Nedbank s may have a position in any such instrument at any time. Nedbank recommends that independent tax, accounting, legal and financial advice be sought should any party seek to place any reliance on the information contained herein. This report is intended for use by professional and business investors only. It may not be considered as advice, recommendation or an offer to enter into or conclude any transactions. This report has been prepared for general dissemination and information purposes only and may not be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. Any additional information relative to any financial instruments and/or financial products reviewed in this report is available upon request. All rights reserved. Any unauthorised use or disclosure of this report is prohibited. This report may not be reproduced without the prior written consent of Nedbank. The information contained in this note is intended solely for the recipient and may not be distributed by the recipient. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of Nedbank or its affiliates Economic Commentary 21 October 2015 Page 6 of 6