While South Africa is clearly not out of the woods yet regarding our fiscal situation, Minister Godongwana’s maiden Budget this week shows that we have come a long way since this time two years ago, and we are now in a vastly improved position with significantly less debt default risk. It appears that we are strongly, albeit slowly, moving in the right direction and markets should respond well to the Minister’s Budget.

This was the view of Old Mutual Investment Group Chief Economist, Johann Els, following the delivery of the National Budget on 23 February 2022, as he unpacked the contents of the Minister’s speech and lauded the Budget’s commitment to ‘unflinching’ fiscal consolidation.

“This was a market-friendly budget, following strongly on from the positive precedent set by the Medium-term Budget Policy Speech (MTBPS),” he says. “Markets will like the emphasis on fiscal consolidation, the earlier primary surplus target, the earlier stabilisation in the debt ratio, the tax giveaways for consumers, the lower company tax rate and the fact that no significant extra funds will be made availble for SOEs,” he explains.

Of particular significance, according to Els, is that the debt ratio is expected to peak at 75.1% versus the vastly higher previous peak, expected at 95.3% in the October 2020 MTBPS (or even lower at 73.5% based on Els’s estimates).

“Ultimately, this budget means that our sovereign ratings have very likely troughed. I expect further positve ratings news, with Moody’s potentially upgrading their current ‘negative’ outlook to ‘stable’ in the near future, following Fitch’s similar move after the November 2021 MTBPS,” he adds.

This good news Budget comes off the back of a better-than-anticipated revenue overrun driven largely by resource companies' revenue performance.

Els is enthused by the Minister’s emphasis that nothing in the budget can ‘replace the structural changes our economy needs.’ “It’s encouraging that the Minister has noted that revenue performance is not due to an improvement in the capacity of the economy and has warned that any expenditure increase should be done in a way that does not negatively impact the deficit.

“We are firmly aligned with his sentiments that ‘any large permanent increases in spending, such as a new social grant, cannot be accommodated without matching permanent increases in revenue’,” he adds.

Regarding the markets’ response, Els believes this Budget will be good for both equities and bond markets. “Lower tax for consumers and positive sentiment around company tax rates will bode well for equity markets, while fiscal consolidation, an earlier primary surplus, earlier debt ratio peak and the fact that ratings have likely troughed is good news for bond markets,” he says.

However, if South Africa is to avoid fiscal risk further down the line, clear economic policy reform measures are crucial. “This year’s Budget has certainly made progress in improving our fiscal position; however, to echo the Minister’s comments, this is unsustainable without the structural changes our economy so urgently needs,” he concludes.

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