2019 National budget review: Eskom financial support killing the green shoots of renewed fiscal prudence.

Herman van Papendorp and Sanisha Packirisamy of Momentum Investments have released their full analysis of the 2019 Budget.

The highlights include:

• The fixed income and currency markets shrugged off a
  
  wider-than-anticipated budget deficit projection and a higher debt ratio
  
  for the next three fiscal years.


• A rising budget deficit and spending growth that outstrips revenue
  
  growth in the next fiscal year points to a slightly expansionary budget
  
  initially, which is marginally positive for the economy and somewhat
  
  profit-positive for the companies linked to the local economy. In the
  
  latter two years, the budget becomes contractionary, which bodes well
  
  for the bond market.


• Treasury downwardly revised its growth assumption in response to a
  
  materialisation in negative growth risks.


• Tax collections have disappointed by R15.4 billion in the current fiscal
  
  year due to a weaker economy, tax administration issues and an
  
  acceleration in value-add tax (Vat) refunds.


• A tepid growth environment leaves fewer obvious additional revenue
  
  streams available to be tapped into.


• Little compensation for bracket creep and a further rise in sin taxes and
  
  fuel levies were announced.


• The self-imposed expenditure ceiling has been raised by R16 billion for
  
  the next three fiscal years to provide additional assistance to Eskom,
  
  which remains an integral player in the anticipated growth recovery.


• Above-inflation increases to social grants, limited retrenchments in the
  
  public sector workforce, an extension of Vat-exempt products and
  
  promises made at the Jobs Summit should limit the negative consumer
  
  effect of bracket creep, higher sin taxes, fuel levy increases and pay
  
  freezes in the public sector at selected job levels.


• The poor financial standing of some of the country’s key parastatals still poses a risk to the overall debt trajectory.


• Rating agencies are likely to take a wait-and-see approach to allow the parastatals
  
  time to enact their turnaround strategies.


• Despite government’s upwardly revised expenditure ceiling, wider
  
  fiscal deficit and higher debt ratio, its ongoing commitment to fiscal
  
  consolidation in the medium term and conditional nature of its
  
  guarantees to the troubled parastatals could stave off a downgrade in
  
  the sovereign rating. Nevertheless, there is a non-negligible chance of
  
  an outlook change to negative by Moody’s in March 2019, in
  
  Momentum Investments’ opinion.

Quotes can be attributed to Sanisha Packirisamy, Economist at Momentum Investments, and Herman van Papendorp, Head of Investment Research & Asset Allocation.

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