Macro Perspective 44 | Sharp deterioration in fiscal metricsThe medium-term budget policy statement (MTBPS) tabled today revealed a sharp deterioration in fiscal metrics, aligning with expectations. Despite negative revisions, the budget is deemed realistic, considering the current circumstances. While reflecting challenging economic realities, the MTBPS outlines a pragmatic approach to financial management, emphasising consolidation, realistic assumptions, and strategic fiscal policies. For more in-depth analysis, tune in to our podcast episode by Peter Brooke discussing the implications of these measures on South Africa's economic landscape.DATE: 01 November 2023 | LISTEN TIME: 3 MIN

      Peter Brooke  00:00

      Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 44 of 2023, and I'm going to talk about South Africa's medium-term budget policy statement.

      Peter Brooke  00:12

      This annual document lays out the government plans for the next three years, which covers a massive 7.4 trillion of spending. In principle, that should be a boring document and it basically was. The deterioration in the fiscal position was expected. And it was interesting to see that the rand and the bond market both strengthened on the announcement. It is possible that the market liked the Minister of Finance's commitment to fiscal consolidation through spending reductions, efficiency measures, and moderate tax increases. However, I suspect most cynical investors think actions speak louder than words and were just happy that there was no bad news or negative surprises. And this is important, because sometimes if when a risk isn't realised, that that allows markets to go up.

      Peter Brooke  01:06

      However, there are a couple of key points of interest. Firstly, around spending cuts. The minister has balanced off the cost of lower revenue and higher interest rates, and he's pushed that into deeper spending cuts. This will be a tough political sell as cabinet ministers fight for their share and remember that next year is an election year.

      Peter Brooke  01:34

      The second area of interest for me was the state-owned enterprises, which are largely shut out of capital markets. The Land Bank is in default, Denel is in financial distress, and Eskom is on debt relief. The anomaly was that Transnet didn't receive any relief, which feels a bit unrealistic. My view is we shouldn't waste a good crisis, and the faster the government exits the SOEs, and the private sector takes over, the better.

      Peter Brooke  02:03

      The third issue is where are we in terms of the debt trap. Government debt is forecast to rise to 77.6% of GDP. And I don't feel this is particularly scary in a global context, but the real issue is the high cost of debt. The weighted cost of debt has risen to 9.5% from 8.3% in February. This means that 20 cents of every rand of government revenue is being spent on debt, and it crowds out the real economy. The National Treasury represents the thin red Line holding this in check. And they have been a blessing to South Africa. However, the global environment is now more hostile with a rising global cost of capital and tighter liquidity, which is an unhelpful backdrop. So, while we think the medium-term budget policy statement is broadly a realistic and sensible document, politics will determine if we pull back from a debt trap. This is why next year's election is so important for markets, and South Africa must avoid taking the populist route.

      I hope you enjoyed this perspective. Until next week.