South Africa:2019 – Midterm Budget Speech – Analysis – My comments

[
I received this from someone I know and have respect for with regard
to financial analysis. I had to hide the source. I yawn when these
lying scum talk in parliament. There are things they are also hiding.
I saw another afrikaans economist was mentioning it. There is so much
nonsense and pure rubbish spoken in parliament. A den of thieves and
liars. Let’s see what Moody’s does. Whether SA will be
downgraded. But I think the Jews will try to stop that. They love
these communists especially the black Jewish President Ramaphosa. The
one is a bigger piece of shit than the next I tell you. Jan]

MIDTERM BUDGET SPEECH 2019

Wednesday, 30 October 2019

“The food cupboards are almost bare….The consequence of not acting now would be gravely negative for South Africa. Over time, the country could likely face mounting debt-service costs and higher interest rates and may enter a debt trap.”

-Finance Minister Tito Mboweni

Finance Minister Tito Mboweni presented an alarming medium-term budget policy statement (MTBPS) yesterday. While there was a general consensus that the MTBPS would paint a bleak picture of the country’s deteriorating financial position, it was alarming in respect of the lack of detail or action to arrest this deterioration.

No signs of fiscal consolidation

Debt as a percentage of GDP, which the government had previously predicted would peak at just over 60% in 2023/24, is now expected to increase to just over 71% in 2022/23. If Eskom requires further financial assistance, the debt-to-GDP ratio could climb as high as 80.9% by 2027/28. This is unsustainable for an economy the size of South Africa. Debt service costs are already the fastest growing item in our expenditure.

Further bailouts for ailing SOEs

While Mr Mboweni conceded “ we cannot continue to throw money at Eskom”, further funding for the utility above the R230bn set aside over the next decade has not been ruled out. Furthermore, the government will probably have to step in to pay South African Airways debt of R9bn as commercial banks may be reluctant to reschedule this debt. Of even greater disappointment was the lack of detail on how Eskom’s R450bn debt load is going to be addressed or how the burden of SOEs on the fiscus would be reduced.

A realistic assessment of economic growth

National Treasury has downgraded its 2019 GDP growth forecast to 0.5% from 1.5%, citing a “gradual recovery in confidence and investment”. The economy is expected to expand by 1.2% in 2020 and 1.6% in 2021, well below the levels that are needed to address unemployment. Weak growth will temper much needed growth in tax revenues, which is sorely needed to arrest our widening budget deficit.

Tax revenues under pressure

Weaker economic growth has resulted in lower tax revenues, which has increased the government’s budget deficit. The 2019/20 consolidated budget deficit is now 5.9% of GDP compared to 4.5% of GDP in the February 2019 budget. National Treasury has revised down expected growth in tax collection, which will increase the budget deficit over the next two years. The budget deficit is expected to reach 6.5% in 2020/21.

SA bonds weaken and the rand slumps

The rand and government bonds weakened in response to the mini budget. The ZAR weakened by 2.57% to R15/$ and the yield of the 10-year benchmark government bond suffered, rising by 20bps, to close the day at 8.597%. Bond yields move inversely to bond prices.

Credit rating at risk

Moody’s, the only rating agency which has kept South Africa’s dual sovereign credit rating at investment grade, is set to review its rating this Friday. The dramatic increase in debt, a further deterioration in the country’s fiscal metrics and lack of structural reforms to boost growth are credit negative. The risk of Moody’s downgrading its outlook from stable to negative is looking more probable. If the outlook is cut to negative, it means South Africa is placed on a ratings watch, with a rating review to follow within 18 to 24 months.

Conclusion

While taking a hard-line against further SOE support and cutting travel, car and cell phone allowances for government employees is admirable, the deterioration in our debt profile and a lack of cohesive economic policy to ignite growth in an attempt to address unemployment and increase tax revenues, leave South Africa in a precarious position.

These issues have been at the heart of the investment debates at xxxx. We have been cautious about our exposure to South African government bonds with longer maturities (longer maturity bonds are riskier). Despite the very attractive yields offered by SA 10-year government bonds (real yields in excess of 4%), we felt that there was insufficient compensation to warrant an overweight position in this asset class. In view of this, we have been relatively underweight long maturity SA government bonds in our xxxx Multi-Manager, Private Client Portfolios and Managed Portfolio Strategies. We will reassess this position once Moody’s has communicated its outlook for South Africa’s sovereign rating on Friday, 1 November 2019.

One thought on “South Africa:2019 – Midterm Budget Speech – Analysis – My comments

  • 31st October 2019 at 6:10 pm
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    A good analysis, consistent with a USD/ZAR chart that’s setting up for a multi-year rip.

    Reply

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