• In a hard-hitting Budget that bluntly put a daily R1-billion price tag on borrowing costs, Finance Minister Tito Mboweni pulled off a political juggling act “in the interest of our people and our country, and not in the narrow objectives of any political party”.

  • South Africa has set aside 3.7 billion rand ($261 million) to help black farmers who want to purchase land and acquire title deeds even as the country is changing its laws to make it easier to expropriate land without compensation.

     That stands in contrast with demands from the opposition Economic Freedom Fighters who wants all land under state control.

    Lawmakers last year approved a proposal by the ruling African National Congress to change the nation’s constitution to enable taking land without paying for it in certain circumstances as a way to address skewed ownership patterns created during white-minority apartheid rule. The country’s main commercial farmers’ lobby group says the move will deter investment and it’s invoked investor concerns of Zimbabwe-style land grabs.

    South Africans who support the move argue it will go some way to addressing economic injustices. Many black citizens who live in shantytowns and travel long distances to get to places of work, hope to receive land to build homes.

     Finance Minister Tito Mboweni announced the spending measure in his budget speech Wednesday, adding that the country will also allocate 1.8 billion rand to implement 262 priority land-reform projects over the three fiscal years.

    The government plans to introduce two grants in the fiscal year starting April next year, to upgrade informal settlements. The funds will total 14.7 billion rand and will affect 231,000 households, it said.

  • A strong Budget will come down to simple action and hard choices taken now for the long-term benefit of the country, says Citadel portfolio manager Mike van der Westhuizen.

    Finance minister, Tito Mboweni will deliver the 2020 National Budget Speech on 26 February, to announce how the government plans to spend its budget, while also collecting money.


    “The main thing to look at, given that the Moody’s is watching closely, is the need to rein in the budget deficit, which is starting to spiral even more out of control,” he said.

    In the 2019 Medium Term Budget Policy Statement (MTBPS) the Treasury projected a consolidated Budget deficit of 5.9% of GDP, averaging 6.2% of GDP over the next three years.

    A low growth, low inflation environment also affects the debt-to-GDP trajectory, the sustainability of which minister Mboweni has already warned about.

    As a proportion of South Africa’s GDP, the MTBPS notes a hike in gross debt from 56.7% in 2018-19, to 60.8% in 2020-2021 and 71.3% in 2022-23 if the status quo does not change, something the rating agencies are understandably concerned about.

    “These numbers show that the previous goal of fiscal consolidation is currently not on target,” said Van der Westhuizen. “Although it must be said that while Treasury appears to be doing everything in its power to stop the slow bleed, it’s a cooperation issue with the rest of government and other influential stakeholders.”

    This disconnect between what needs to happen and the disinclination within government to act is likely to come through on Budget day.


    Revenue under pressure

    Distilling the multiple issues at play, Van der Westhuizen said that “government needs to find about R150 billion in savings over the medium-term expenditure framework, being the next three years. So that’s essentially R50 billion a year in savings that needs to come through.”

    But how can this be achieved?

    Treasury could look, once again, to the taxpayer. But, said Van der Westhuizen, “with the taxpayer already squeezed, options are increasingly limited. In prior years, we’ve seen personal income tax hikes and last year a VAT hike”.

    “Easy wins are fuel levies and sin taxes that rise every year, as well as bracket creep, i.e. not adjusting the tax brackets for inflation. Other potential tax avenues could include a new upper tax bracket, wealth tax, estate duties or even changes to capital gains tax or dividend tax. Although helpful, these don’t really do the heavy lifting.”

    There has been talk that the only really effective lever left to pull could be to raise VAT by one percentage point to 16%, which would inject between R20 billion and R35 billion in revenue. Although it would be a particularly unpopular move politically, it is increasingly possible, said Van der Westhuizen.


    Expenditure in the crosshairs

    Given the revenue constraints, Van der Westhuizen believes all the hard work should be done on the expenditure side. But, again, taking steps to contain and curb expenditure will come down to political will.

    “The big line items here are public sector wages (about 34% of expenditure), debt service costs (10%) and social grants (10%). Interest payments and social grants are essentially fixed, leaving the wage bill as the main lever.

    “This is a bit tricky at this stage since multi-year wage negotiations are still in process and will only conclude around March 2021, so we will watch this carefully,” said Van der Westhuizen.

    “The government tried a voluntary resignation and natural attrition approach to reduce the wage bill, but that hasn’t been effective. Maybe the lower inflation outlook from the Reserve Bank and pinning of inflation expectations might help in negotiating lower wage hikes, but that is unlikely to be enough.”

    “Even if government took a firm stance of CPI less 2%, which would have the trade unions baying at its feet, it would only save about R105 billion over three years, leaving us some R45 billion short. The point is that even a drastic decline in wage growth doesn’t result in sufficient scaling back in spending,” Van der Westhuizen said.


    The SOE drag continues

    Despite this constrained picture, there is still bound to be more budgetary support doled out for state-owned enterprises (SOEs) and this issue will loom large over Mboweni’s speech, said Citadel.

    “In late-January we saw the Development Bank of South Africa (DBSA) grant a loan to South African Airways (SAA) as part of its restructuring,” said Van der Westhuizen.

    “That represents a red flag in terms of the cross contamination of SOEs, with a well-performing SOE such as the DBSA bailing out a poor-performing one. Government cannot afford to use its balance sheet to rescue these SOEs, so it is rearranging the deck chairs.

    “Our concern is the strain this might put on the better-performing SOEs. For now it might not be a big issue given that the DBSA does have rules governing its lending, but the trend isn’t pleasing.”

    And Eskom is likely to remain both a concern and a drain. Clearly there is much in-fighting at the parastatal and disagreement about its turnaround direction coupled with bouts of load shedding, which indicates that South Africa is certainly not out of the woods. “Eskom will, again, be a massive issue to watch for in the Budget,” said Van der Westhuizen.

    “For at least the next few years, support will have to be pencilled in for the utility. If that number were to rise significantly or if there were further talk of taking Eskom debt on the government balance sheet, then we would be in deep trouble.”

    What could prove a fillip for the country would be positive developments around key issues such as power generation.

    “There has been much talk about mining companies, and other businesses, being permitted to generate their own electricity and for independent power producers to come onto the gird, but we are yet to see formal communication in this regard.

    “If something concrete is announced, even some compromise around public-private partnerships, then that would be very positive,” said Van der Westhuizen.


    The D-Day downgrade

    While the state fiddles, and South Africa’s economy burns, a downgrade in the country’s sovereign credit rating continues to hang over South Africa’s head. While the markets have long priced this in, the continued expectation that the axe will fall is, in itself, creating uncertainty and tension.

    On 28 January 2020 Moody’s Investors Service analysts noted that it was “a bit early” to judge the impact of both policy and structural reforms. Lucie Villa, Moody’s lead sovereign analyst for South Africa, told Bloomberg that while the data was not pointing to either a particularly positive or negative direction, that “there is nothing really to flag for the time being”.

    This indicates that Moody’s may well be prepared to give SA more leeway, but obviously, the credit rating agency will be keeping a close eye on Mboweni’s Budget.

    “Certainly, everyone expects this Budget to be poor,” said Van der Westhuizen, “but they might manage to demonstrate the will to cut expenditure and show just enough fiscal consolidation and, in that case, Moody’s might delay any decision until November, after the next MTBPS.”

    That said, while government might do enough to keep Moody’s at bay for the first half of this year, it remains Citadel’s view that the agency will downgrade South Africa in 2020. While this would put South Africa out of the World Government Bond Index, Van der Westhuizen believes it is time for the country to take its medicine.

    “Foreigners would come in and sell some of our bonds on index exclusion but, with some of the most attractive yields available, there would definitely be buyers stepping in,” he said.


    Reading the mood

    Citadel noted that anyone who follows Mboweni on Twitter will be keenly aware that the finance minister is getting significant pushback, making him increasingly despondent with the lack of progress. There appears to be considerable opposition to his plans, as laid out in the economic strategy document released in August 2019.

  • AgBiz has welcomed the frank assessment by Minister Tito Mboweni, as well as the recognition that economic growth is fundamental to fiscal sustainability.

  • An advisory panel on land reform appointed by President Cyril Ramaphosa in September 2018 gave a provisional report-back to Parliament on Wednesday – and their conclusions so far are sobering.

  •  South Africa will reach the fiscal cliff by 2042 if it does not change its ways and back up the budget speech with concrete actions, says Professor Jannie Rossouw, the head of School of Economics and Business Sciences at Wits Business School.

  • Finance Minister Tito Mboweni started his budget speech with his usual aloe reference: “The Aloe Ferox survives and thrives when times are tough. It actually prefers less water. It wins even when it seems the odds are against it.” Here’s the executive summary of this plus hour long discussion.

  • The government has emphasised the need to support the agricultural sector as part of efforts to promote faster and sustained inclusive economic growth.

  • While Finance Minister Tito Mboweni delivered the Mid-Term Budget Speech on Wednesday 28 October 2020, all eyes were on him to decipher a way forward for South Africa in terms of economic recovery.

  • Agri SA notes the Medium-Term Budget Policy Statement tabled by Minister of Finance, Tito Mboweni in parliament on Thursday 28 October 2020.

  • SA Canegrowers welcomes the decision to maintain the health promotion levy (or ‘sugar tax’) at its current rate.

  • Fanie Brink, Independent Agricultural Economist

  • Finance Minister Enoch Godongwana delivered his maiden budget speech yesterday with few surprises.