Stay abreast of COVID-19 information and developments here
Provided by the South African National Department of Health
MINI BUDGET: DEBT DYNAMICS
STILL A CONCERN
Investment Economist at Sanlam Investments
Nov 12, 2021
Broadly, the Mini Budget projections for the medium term were in line with prior expectations. The restrained expenditure framework clearly shows National Treasury’s intent to hold the line on fiscal discipline.
Also, this year’s revenue projection is R120.3 billion higher than initially expected in February 2021, due to the favourable impact of high export commodity prices on income. As a result, the Main Budget deficit narrows to -6.6% of gross domestic product (GDP) in 2021/22 from -9.9% of GDP in 2020/21. Over the medium term, the Main Budget deficit decreases further to -4.9% of GDP in 2024/25. At the same time, the primary budget deficit improves from a deficit of -2.3% of GDP in 2021/22 to a small surplus of +0.2% of GDP in 2024/25.
However, the key question is whether the assumptions underpinning the medium-term outlook are likely to pan out. National Treasury’s GDP growth projections and tax buoyancy assumptions are reasonable, with real GDP growth projected below 2% from next year, while some moderation in commodity prices is expected.
Execution risk, however, lies in the expenditure projections. Given the better-than-expected revenue performance, Treasury increased total Main Budget non-interest expenditure by R31.9 billion in 2022/23 and by R29.6 billion in 2023/24 following an upward adjustment to 2021/22 non-interest expenditure of a net R59.4 billion. This reflects additional spending of R77.3 billion, of which the main components were the wage bill adjustment of R20.5 billion and the R32.9 billion increase in spending following the July 2021 protests, partially offset by underspending elsewhere and a drawdown on the contingency reserve.
But here’s the thing. Non-interest spending is projected to fall to 23.5% of GDP by 2024/25, from 26.3% of GDP in 2021/22, with the focus on the wage bill. Consolidated government wages are projected to fall by -0.1% in 2022/23 and by -1.4% in 2023/24, before increasing by 4.4% in 2024/25 in current prices. This implies government workers’ real wages are set for a material downward adjustment over the next two years. Absent a finalised wage deal, this clearly holds significant risk to the expenditure and overall fiscal outlook.
Further expenditure on social grants declines in absolute terms from R221.7 billion in 2021/22 to R215.3 billion in 2024/25. The Minister noted spending is focused on service delivery and is ‘highly redistributive’. Still, the current unemployment rate of 34% suggests this will also be difficult to implement. It appears Treasury favours spending on employment creation (R74 billion will be included for this in the 2022 budget to be spent over the medium-term framework period) in lieu of grants spending. However, this may not preclude possible upward adjustments to grant support as the debate around this unfolds.
At least, given the revenue bonanza, the gross loan-debt ratio dips to 69.9% of GDP at end March 2022 from 70.7% of GDP at end March 2021. Looking further ahead, Treasury expects the gross loan-debt ratio to stabilise at 78.1% of GDP in 2025/26, before gradually declining thereafter. Debt stabilisation is ‘back-ended’, though.
There are a myriad of assumptions underpinning the projected path of the fiscal ratios. It is, nonetheless, clear that the underlying debt dynamics (i.e., the interplay between interest rates, economic growth and the primary budget balance) are not favourable, implying that the debt ratio climbs persistently over time. We expect interest payments on government debt to increase to 21% of Main Budget revenue by 2024/25 from 18% of revenue in 2021/22. This crowds out expenditure elsewhere.
Varying assumptions as regards GDP growth or commodity prices change the slope of the expected debt trajectory, but the debt ratio is still expected to climb over the next three years.
Moreover, beyond the medium term, we are not privy to the factors or assumptions that are expected to lower the debt ratio as projected by Treasury. Our own trend assumptions do not lead to debt stabilisation over this period. We think something fundamental must change, that is, real GDP growth must lift to stabilise government debt (or more spending cuts and a larger adjustment to the primary budget balance are needed).
To this end, Minister Godongwana’s emphasis on increasing capital expenditure, while constraining government consumption, amid other measures, including restructuring of state-owned companies, is spot on. However, implementation is the key issue.
At the same time, the gross borrowing requirement increases from R475.1 billion in 2021/22 to R493.3 billion in 2022/23, including an increase in redemptions to R113 billion next year from R65.2 billion this year.
Total domestic long-term loan issuance in 2021/22 amounts to a revised expectation of R285.3 billion (sharply lower than the R380 billion previously expected), while R77.6 billion in foreign loans is also pencilled in (significantly larger than the R46.3 billion projected in February 2021).
However, funding through domestic long-term loans jumps to R381.8 billion in 2022/23, while foreign funding declines to R47.0 billion. In the absence of sustained significant foreign capital inflows, too much government borrowing constrains private sector credit and investment, which in turn restricts GDP growth.
Finally, Treasury has indicated it intends to run its cash balances down by R112.2 billion in the current fiscal year to assist with funding. This is in line with the R112.6 billion initial projection published in February 2021. Projected use of cash balances next year is minimal. This begs the question as to whether Treasury will continue to run a large cash balance, or whether part of the cash balance will be employed for another purpose (although we should bear in mind cash balances at the South African Reserve Bank seem likely to be maintained, while some cash is also required for operational purposes).
Commentary by Alwyn van der Merwe, Director of Investments:
Investors generally don’t want surprises when politicians deliver policy statements or, in this case, provide broad guidance in terms of the planned fiscal route for the country. While we didn’t get many surprises in the projected fiscal numbers for the next three years, concerns about the growing debt ratio remain despite the reassurance of government’s commitment to fiscal consolidation via expenditure restraint combined with structural reforms to lift trend growth and, in turn, fiscal revenues.
The response of local financial markets to Minister Godongwana’s MTBPS was muted. The rand strengthened marginally, 10-year bond yields tracked sideways, and the local equity market tried to digest fresh global inflation numbers rather than focusing on the speech.
The key fiscal ratios look materially better compared to those projected in February, but it was quite clear in advance that the revenue windfall and the upward adjustment of the local GDP – simply put, the size of the economy – would lead to better numbers. Arthur’s summary above reflects this.
This path to a small surplus in 2024/25 should address the fears of those who were concerned about government’s intentions of restoring fiscal sustainability. However, there are many assumptions underlying these fiscal ratios, including the debt-to-GDP ratio. Some of these assumptions rely heavily on the execution of discipline on the expenditure side. It remains to be seen whether government can stick to its expenditure profile while addressing the social challenges our country faces.
A final observation: the overrun in revenue and projected fiscal constraint would have relieved the potential pressure on new issuance in the bond market. Longer-term domestic bond issuance for FY21/22 was reduced from R380 billion to R285 billion. Authorities have raised R180 billion in domestic long-term loans in FY21/22 (in cash terms). Treasury is on track to issue ~R280 billion in FY21/22 at the current pace, marginally below its R285 billion forecast.
We expect the pace of weekly issuance to be unchanged for the rest of FY21/22, although there is a small risk for a marginal increase in order to meet the full-year projections. The authorities have raised their projection for foreign issuance, with US$5.3 billion now seen (up from US$3.1 billion). Of this, US$3 billion is projected to come from capital markets, with the remaining US$2.3 billion coming from multilateral institutions.
In conclusion, the projections on paper were clearly met with approval by financial markets. However, the lingering uncertainty will remain as the fiscus will need to strike the right balance between growth initiatives, addressing social and political requirements, and achieving its objectives in terms of fiscal consolidation.
Sanlam Private Wealth manages a comprehensive range of multi-asset (balanced) and equity portfolios across different risk categories.
Our team of world-class professionals can design a personalised offshore investment strategy to help diversify your portfolio.
Our customised Shariah portfolios combine our investment expertise with the wisdom of an independent Shariah board comprising senior Ulama.
We collaborate with third-party providers to offer collective investments, private equity, hedge funds and structured products.
a Portuguese opportunity
Sanlam Private Wealth
TRENDS TO WATCH
Director of Investments
HOW WE VALUE SHARES:
A USEFUL FRAMEWORK
Head of Equities
DO WE NEED TO BUCKLE UP?
FINANCIAL MARKET JITTERS:
ARE THEY JUSTIFIED?
Sanlam Private Wealth
THE STORY OF TECH:
WILL THE BULL RUN LAST?
Head of Equities
TIME TO SHINE?
Senior Investment Analyst
THE BEST COURSE OF ACTION
Head of Equities
South AfricaSouth Africa Home Sanlam Investments Sanlam Private Wealth Glacier by Sanlam Sanlam BlueStar
Rest of AfricaSanlam Namibia Sanlam Mozambique Sanlam Tanzania Sanlam Uganda Sanlam Swaziland Sanlam Kenya Sanlam Zambia Sanlam Private Wealth Mauritius
GlobalGlobal Investment Solutions
Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.