As has been the case for the past few years, the main theme heading into yesterday’s National Budget tabling centred on Treasury’s commitment to fiscal consolidation, in the context of the massive funding requirements of State Owned Entities (SOEs) and a still fragile domestic economic growth environment.
Written by: The Interest Rate Team
Contrary to the market’s initial take on the budget, we remain underwhelmed by medium term budget expectations and, in many respects, still read yesterday’s budget as further ‘kicking of the can down the road’.
Yesterday’s biggest news was the extraordinary fiscal support to Eskom: R69bn budgeted over the medium term expenditure framework (MTEF) as a “provisional allocation” for reconfiguring Eskom, to be transferred as a cash injection of R23bn per year over a three year period. This allocation negates the benefit of departmental expenditure constraint in the 2018/19 fiscal year, and ultimately results in the lifting of the previously sacrosanct expenditure ceiling by R16bn over the MTEF. The net effect of the extraordinary support for Eskom ultimately results in a wider budget deficit over the MTEF (now budgeted to peak at -4.5%/GDP in 2019/20) and a gross debt-to-GDP profile now expected to peak in excess of 60% in 2023/24.
Our reading of yesterday’s budget would be kinder if we were convinced that the extraordinary support to Eskom would be enough to negate the fiscal and economic risk the entity poses over the medium term. This seems to be where we differ with the market in our reading of the budget. While over-delivering in its support of Eskom, relative to prior market expectations, we’re of the view that this support still falls short of what is required to keep Eskom solvent over the medium term.
The bottom line: Without improved domestic growth, South Africa’s debt burdening looks increasingly unsustainable – particularly in light of the abandonment of two critical fiscal consolidation anchors (expenditure ceiling and deficit-neutral SOE funding). Rating downgrade risk remains elevated.