SA continues to tread an increasingly narrow watershed

So, the benefit of being so far away from #SouthAfrica means that quite often I find that I am able to review economic developments in a much more dispassionate way and hence apply a fair dose of objectivity which sometimes comes into question when one is always immersed in the SA news flow. My quick take on #BudgetSpeech2020 below.

I was looking forward to this years Budget Speech as my first SA budget that I would be looking at from abroad. What is always important is the need to separate the #narrative which is generally pervasive in local media and look at the data so as to inform a view based in fact without being swayed by the dominant rhetoric at the time.

That said, media reports on @tito_mboweni ‘s budget speech are currently glowing and it does appear as though this minister, the 5th or 6th (depending on how you choose to measure) in as many years, has attempted to pull the proverbial rabbit from the hat.

The prognostications of experts and in all honesty, my own expectations, were proven somewhat incorrect in that the minister presented a budget which did not lean heavily on tax increases. This is one of the most important developments in my view in that it symbolizes a regime shift and an eventual realization by the #treasury that SA has passed the top of the Laffer Curve. That is to say that higher taxes would likely yield lower revenues. It was my view 2 years ago, that we had indeed reached the inflection point on the Laffer Curve and this has been evidenced by decreasing tax buoyancies over the last 2 fiscal years. Bracket creep is to be expected and does most of the heavy lifting on the revenue side.

Source: National Treasury

 However, it is apparent that government has not shied away from increasing the fuel levy yet again. While an efficient tax from SARS perspective in that the administrative burden of collecting such taxes is low, it is the tax which I feel does the most damage to the poor and working class South Africans. The reason for this is that these are the people who generally pay the largest percentage of their incomes in fuel and transportation. Yes, inflation has been lower than expected and so the unintended consequence of prudent #monetary policy and curbing #inflation expectations by the #SARB appears to be providing fiscal room for treasury to increase fuel levies. Yes, at 25c, it is much lower than we have seen in recent years but the money must be found somewhere and as such, the fuel levy remains a nice arrow in Treasury’s quiver.

On the expenditure side, government has proposed to cut expenditure by R151bn (over the framework) compared to previous estimates. This is encouraging in that it suggests fiscal discipline. However, the significant caveat here is that such a commitment leans heavily on reaching a #social compact with labour unions. Early indications from Cosatu (the country’s largest trade union) indicate that while they are willing to discuss and negotiate in good faith, that they are loathe for government to solely balance the books on the backs of workers. Needless to say, much work remains to ensure that all parties involved are able to chart a course through the current constraining factors. An important point is that #SA continues to have one of the most bloated civil services and governments in the world and despite that, that service delivery in many sectors remains significantly sub-par. #SOE survival is systemically important, despite being a large cash drain, inasmuch as it informs governments credit worthiness and failure to provide adequate support would have larger knock on consequences. As such, bailouts of specific SOE’s was largely expected.

The Achilles heel of the South African #economy in the context of persistent sluggish #growth and low confidence remains a debt burden which remains very high for an emerging market. Deficits are large and not going away anytime soon. At above 6%, all I can say is #Yikes!

Source: National Treasury

 Yes, SA does not have the debt levels seen in many other global economies, but the cost of SA debt is comparatively high relative to other #EM #markets and this means that debt service remains an albatross on SA’s neck. It has been for sometime and as I have said in other writings and commentary, SA is a good example of Einstein’s quote on the power of compounding working against us.

The fiscal situation and the commensurate debt burden on South Africans remains terribly high and continues to crowd out the ability to invest in the economy as well as to invest in South Africa’s human capital. Social programs and investment programs alike are the causalities to South Africa’s debt service which now eats 15% of each rand ‘earned’ by the state. I was asked at the S&P conference at which I spoke last year, ‘What keeps you awake at night?’ The answer was debt #sustainability. This remains the case. Do I think SA will not repay its debt?

No. South Africa has exhibited a very high level of fiscal diligence in ensuring that its obligations continue to be met. However, this has been on the back of a deteriorating balance sheet and increased debt issuance. Foreigner’s remain large holders of SAGB’s.

Source: National Treasury

As at January, this stood at 37.3%, slightly above the average over the last 10 years of around 35% and higher than in many other EM's. Investors earn good carry and can hedge out the FX risks. Real rates in SA remain attractive. This is likely to remain the case. SA’s debt remains predominantly rand denominated and this remains a significant buffer against externally driven vulnerabilities.

What of Moody’s? Well, technically, SA could have been downgraded a long time ago. I think that many global investors have looked at this ad nauseum and the fundamentals are well baked into the price of SAGBs. The rand remains the pressure valve but if markets are reasonably confident that the current administration has the political capital it needs to assuage concerns of labour unions, then we may well have bought a little more time and that SA continues, as it has for the last 12 years since the financial crisis, to tread on an increasingly narrow watershed. South African's should pray that globally low rates remain and are here to stay and that benign capital markets continue to act as the wind in SA's sails.

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