PRE-2017 MEDIUM TERM BUDGET SPEECH

Investors closely watching 2017 medium term budget policy statement, says Old Mutual Investment Group

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Investors will be looking to the Finance Minister Malusi Gigaba’s Medium Term Budget Policy Statement (MTBPS) this week to provide more certainty about the commitment of the government to fiscal consolidation, reform of State-owned enterprises (SOEs) and a higher economic growth rate. 

“These factors are absolutely crucial to avoid a ratings downgrade and improve confidence of companies and consumers,” says Johann Els, Senior Economist at Old Mutual Investment Group. 

“The lower than hoped for GDP growth outcome for this year has meant that the 2017/18 tax revenue shortfall is expected to be around R40 to R50bn.

“While Treasury will likely try to mitigate the impact on the deficit somewhat by also reporting lower spending and utilising the contingency reserve, the Budget deficit will probably be close to 4% of GDP versus the 3.1% deficit target envisaged at the time of the February 2017 Budget Speech,” says Els.

He adds that given the current spotlight on South Africa’s economy, the MTBPS needs to demonstrate adherence to fiscal consolidation and Government’s spending ceiling. “If we are to avoid further cuts to SA’s sovereign rating, the ratings agencies will need to see plans to reduce the deficit over time, and not only through extra revenue from existing or new taxes, but also through policy plans to raise South Africa’s economic growth.

“The outcome of these will impact the ratings agencies’ decision not only next year, but also in their next reporting round, expected to happen later this year.”

Els says he hopes to see the Finance Minister address the SOEs’ situation urgently as investors and ratings agencies will be looking for this detail.

“There has been speculation of a sale of the government’s stake in Telkom to provide support to SAA. While this would provide a short term injection of capital without needing to draw down government resources, it is a short term measure and does not address the heart of the SOE problem. which is an urgent requirement to restructure and ideally privatise State-owned enterprises to ensure that they are not a drain on tax resources and the broader economy. Beyond the possible announcement regarding Telkom, we do not expect any significant announcements regarding the sale of state assets,” says  John Orford, portfolio manager at Old Mutual Investment Group’s MacroSolutions boutique,

Regarding an announcement of tax changes or increases, Els says that this isn’t likely, but he adds that the urgency of the current economic situation might force Treasury to announce their intention to introduce changes in the 2018 Budget Speech. “An increase in upper income taxes is likely in 2018 and this may offset the positive impact of any interest rate cuts next year. 

He adds that while a general increase in the VAT rate is unlikely, we can expect the zero rating of fuel to end in February 2018. This will bring in over R18bn, the equivalent of a +1% increase in the VAT rate.

From a market standpoint Orford says investors will be on the lookout for signs of fiscal slippage. “A failure to introduce concrete measures to improve growth are likely to see bond yields rise and the currency weaken, limiting the central bank’s ability to cut interest rates despite subdued inflation and weak growth.

“Should this scenario play out; we would expect sectors of the listed equity market that are sensitive to interest rates to come under pressure. These include banks, retailers and listed property companies.”

Orford concludes, “Whether the MTBPS provides a positive or negative signal for investor, corporate and consumer sentiment, markets are likely to remain cautious until the ANC’s conference in December, which is expected to elect a new leader of the ANC.”

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