Mid-term budget review

The rand weakened into the MTBS, underperforming its emerging market currency peers, suggesting that there may be an increased possibility of a ratings downgrade to come from Moody’s.

Gross Domestic Product (GDP) outlook

Economic growth for 2018 has been revised lower, from 1.5% to 0.7%. The downward revision finds place as the first two quarters of the year have seen an economic contraction and the state of global trade remains uncertain. Growth is however expected to recover to 2.3% by 2021.

Revenue

Revenue collections are expected to fall short of the previous estimates noted in Februaries budget. For the 2018/2019 fiscal year, the collections are expected to be around R27.4bn less than what was guided at the previous meeting. Reasons for this include, upward revisions to estimates on Vat refunds, a shortfall in corporate and personal income tax, as well as a once off payment to reduce the Vat refund backlog.

Expenditure

Mr Mboweni has guided that the expenditure ceiling would be maintained.

Some of the upward adjustments to expenditure include:

-Budget facility for infrastructure projects

- Schools infrastructure backlogs grant

- Drought Relief

- Financial Support to State-Owned Enterprises (SOEs)

Some of the downward adjustments to expenditure include:

  • Declared unspent funds
  • Contingency reserve
  • National government project underspending
  • Local government repayment to National Revenue Fund

The budget continues to prioritise social spending including education, health, the provision of water and electricity services, and social grants as these commitments support economic and social development and ensure sustainable support to millions of South Africans who live in poverty.

Debt servicing costs are the fastest growing area of spending, followed by learning and culture as well as health.

The debt outlook

Upward revisions to gross loan debt, the wider deficit and weaker exchange rate have seen expectations for debt as a percentage of GDP rise. Debt as a percentage of GDP is expected to be realized at 55.8% in 2018/19, rising to 59.6% by 2023/24 before stabilizing.

Moody’s

The rand weakened into the MTBS, underperforming its emerging market currency peers, suggesting that there may be an increased possibility of a ratings downgrade to come from Moody’s Investor Relations (The last of the major rating’s agencies to have South Africa’s local currency debt at investment grade). Moody’s had said it would await the budget speech before reviewing South Africa’s sovereign credit rating. While the agency may be concerned with the downward revision on revenue collection and upward revision on the debt outlook, guidance that the expenditure ceiling would be maintained and that efforts were being made to stabilize ailing SOEs might have appeased the company (for now).

With this in mind, we think that South Africa may be able to preserve its current investment rating with Moody’s, although consider a slightly elevated risk of a ratings downgrade.

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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