Meaningful fiscal improvement unlikely to be revealed by upcoming Budget, says Old Mutual Investment Group

19 Feb 2019
The upcoming Budget speech is set to be dominated by details on Government’s plans to support an ailing Eskom, with the looming threat of a further downgrade by Moody’s. 

This is according to Johann Els, Chief Economist at Old Mutual Investment Group, who adds that weak growth and the critical need for Eskom support means that there is little opportunity to reduce the budget deficit trajectory beyond the ratios targeted in the October Medium-term Budget Policy Statement (MTBPS).

“Those expecting meaningful fiscal improvement to be announced in the upcoming Budget Speech will be disappointed,” he says “However, strict expenditure control has at least created some room for incremental support for Eskom, without negatively impacting the deficit and triggering a ratings downgrade.

“While the necessary support for Eskom means even less capacity for a reduction of the Budget deficit, the 2018/2019 Budget is still likely to see a better outcome than what we saw from the MTBPS, thanks to increased spending control. However, the 2019/2020 Budget is unlikely to deviate much from the 2018 MTBPS, albeit with some room for fiscal drag relief or Eskom support,” he explains.

In total, Els predicts that the revenue shortfall could amount to around R5bn to R10bn in the current fiscal year – helped by some non-tax revenue components.

He highlights that, fortunately, expenditure growth over the first nine months of the fiscal year is running even further below target at 4.6% year-on-year compared to the 2018 MTBPS target of 7.7%. “Government has been able to keep strong discipline in place regarding expenditure growth. This relates to spending that falls outside of the main components of the public sector salary bill, interest payments on debt and social grants, which totals 58% of all government expenditure,” he explains. “Total underspending could roughly equal R20bn to R25bn, potentially far exceeding the revenue shortfall and resulting in the budget balance coming in lower than the 4% deficit targeted in the MTBPS last year.”

Els believes that Treasury could use this ‘windfall’ in one of two ways: to either finance some fiscal drag relief in the new fiscal year or to support Eskom.

Speaking about how Government will deal with the Eskom challenge, Els thinks it is unlikely that Treasury will take on R100billion of Eskom debt at this stage. “With large-scale cost cutting not expected to start in earnest before the elections, a bailout of this size will likely trigger a ratings outlook downgrade from neutral to negative by Moody’s. The agency has already warned that the restructuring of Eskom does not change the debt outlook as there has been no move yet on cutting costs,” he explains.

“It is more likely that Eskom will be given another fiscal injection to the tune of R15billion to R20billion,” he adds. “It seems that this could potentially be done in a deficit neutral manner given my previously mentioned assumptions on a buffer created by increased spending control. For now, small injections are likely less risky than large debt transfers. Unless there is serious fiscal slippage or Treasury decides to take on R100billion of Eskom debt without a serious turnaround plan, I expect Moody’s to maintain its stable outlook and the current investment grade rating.”