Eight things to look out for in the mini budget

Highlights:

1. Commodity price windfall boosts revenues: Although the rate of deterioration in South Africa’s fiscal situation has abated markedly, the recent rollover in prices of SA’s commodity exports highlights the risk of the temporary nature of the commodity price windfall. In our view, with no additional permanent revenue structures in place, risks to fiscal consolidation remain elevated in the medium to longer term.
2. Improvement in fiscal and debt ratios: Aside from an upward revision in nominal gross domestic product (GDP), the projected fiscal and debt ratios are expected to look healthier given better-than-expected revenue prospects for the current fiscal year. A strong boom in commodity prices has underpinned an outperformance in mining revenues.
3. Treasury’s resolve to restrain spending tested: If a more permanent expansion of the grant system is introduced, it is likely that a more permanent revenue stream may have to be considered to limit the drag on the fiscus.
4. Upside risk to the public sector wage bill: After several rounds of slashing the goods and services budget, further reprioritisation of expenditure may negatively affect service delivery, in our view. Consequently, above-budgeted wage settlements continue to pose an upside threat to government expenditure.
5. Unbudgeted bailouts: Given little room to manoeuvre on the revenue front, the extent to which government digs in its heels to curb additional expenditure on ailing state-owned enterprises (SoEs) will determine how successful it is in stabilising the debt ratio in the medium to long term.
6. Momentum behind structural reforms: Despite several economic and political reform efforts, relative governance measures have yet to show a marked improvement on a global comparison.
7. Fiscal responsibility pays off: Highly credible fiscal frameworks improve access to financial markets. Countries with higher levels of credibility tend to face lower interest rates on government bonds and cheaper financing.
8. Implications for SA’s sovereign rating: Although SA’s fiscal and debt ratios are likely to show a notable improvement, debt remains at elevated levels and the pace of reform efforts remains modest against a backdrop of pedestrian growth. Given sticky medium-term fiscal and growth risks, we believe the bias to SA’s sovereign rating outlook is to the downside in the medium term, despite an improved near-term outlook.

Sanisha Packirisamy, economist at Momentum Investments and/or Herman van Papendorp, head of Investment Research & Asset Allocation at Momentum Investments.