President Cyril Ramaphosa’s state of the nation address last week kicked down the road the details on critical questions — specifically how SA will stabilise its public finances — and on to finance minister Tito Mboweni’s budget due out next week.
This has upped the ante on what is already a difficult budget. Expectations are growing among economists that, thanks largely to slower economic growth, revenues are likely to disappoint. As a result, SA’s main budget deficit is expected to widen beyond the 6.2% predicted in the October medium-term budget policy statement (MTBPS).
On the spending side, though Mboweni earmarked R150bn in savings needed over the coming three years, largely from the public sector wage bill, there is doubt from the likes of ratings agency Fitch that the amount can be reached in this budget, particularly as the wage agreement between the state and labour unions stretches to April 2021.
In an economy with poor growth prospects, economists appear divided about whether the Treasury would take dramatic steps, such as lifting VAT to 16%, to shore up revenues.
What Mboweni and his Treasury team can pull off will be the deciding factor in whether Moody’s Investors Service axes SA’s last remaining investment-grade credit rating, and the level of the market reaction that follows.
The uncertainty around the budget hangs over the main data release due out this week: the consumer price index (CPI). In particular the question is what the January CPI, scheduled for release on Wednesday, could mean for the SA Reserve Bank’s next decision on interest rates.
The next monetary policy committee announcement falls on March 19, after the budget but before the Moody’s ratings review due on March 27.
Consumer inflation is expected to come in at a median 4.6% year on year, according to a Bloomberg survey of 13 economists. Though this is up on December’s rate of 4%, it will still be close to the midpoint of the Bank’s target range of 3%-6%. December’s print meant inflation in 2019 averaged 4.1%, its lowest level in 15 years, justifying the 25 basis point rate cut that the Bank delivered in January.
After remaining benign for months, food prices are expected to add inflationary pressure in January, Jacques Nel, head of Africa macro at NKC African Economics, told Business Day. Even if the “notable increase” to 4.6% materialises, it would still be around the Bank’s midpoint and “in normal circumstances this would suggest there is scope to reduce rates to stimulate economic activity”, he said.
But SA’s circumstances are “far from normal and the outlook is clouded by uncertainty”, he said.
The state of the nation address “did not provide the clarity most were hoping for and in fact created additional questions, with the budget reading in February being hyped up even further”, Nel said. The Bank will wait to see how the budget is interpreted by markets before making its next move, he argued.
Though food prices are likely to have increased in January, inflation is likely to remain muted, said Sanisha Packirisamy, economist at Momentum Investments. This is especially because the coronavirus outbreak has seen international oil prices drop, contributing to two petrol price cuts in January and February, and potentially another in March, she noted.
There is “definitely room” for a second rate cut and potentially even a third, she argued. But the five-member monetary policy committee (MPC) appears to be weighing up the fiscal risks, encapsulated in the budget pressures, and the low levels of inflation supporting further cuts, she argued.
The timing of the Bank’s decision will be “dependent on the reaction to an actual downgrade”, she argued.
Though many market players believe the downgrade is already priced in, she said there may still be a “knee-jerk reaction” to a Moody’s outcome, which could make things “tricky” for the Bank if the currency experiences a sell-off. As such it is likely to exercise caution ahead of the Moody’s date, she argued.