Executive Summary

  • The 2019 Budget builds on the 2018 MTBPS, with one sore caveat: the fiscal trajectory has deteriorated even further as NT chose to provide financial support to Eskom to the value of R23 billion per annum. However the bad news doesn’t end there – growth estimates had to be revised sharply lower yet again, and along with this, revenue collection estimates.
  • NT continues to kick the can down the road in terms of fiscal consolidation – the debt-to-GDP profile rises to a peak of 60.2% by 2023. The consolidated deficit as a percentage of GDP peaks at 4.5% in 2019/20, but does not compress below 4% over the forecast period. A primary budget surplus is envisaged in 2023/24; however we do not believe this will be achieved given the weak growth trajectory and rising spending pressures.
  • The higher funding pressures (wider deficits) would necessitate an increase in the weekly auction sizes of both T-bills and nominal bonds, along with other creative sources of funding like a new Islamic Bond announced in the budget.
  • Lastly, in our view the current fiscal policy trajectory will make it difficult for the SARB to ease monetary policy even if inflationary pressures continue to surprise on the downside.
  • We also believe the risk of Moody’s moving South Africa’s sovereign rating to a negative outlook in March has risen. We would previously have seen less than a 50% chance of a negative rating action in the weeks after the Budget, but we now put that probability above 50%.
  • Lastly, in our view the current fiscal policy trajectory will make it difficult for the SARB to ease monetary policy even if inflationary pressures continue to surprise on the downside.


Key highlights from the 2019 Budget:

  • Overall, NT has presented quite a candid budget, which shows that there is no room to manoeuvre the deficit and debt metrics through fiscal adjustments despite its sincere willingness to do so. The budgetary support it has provided to Eskom, as well as the cumulative revenue undershoot are key reasons for the fiscal trajectory deteriorating relative to the 2018 MTBPS. While we had anticipated a deterioration in the country’s fiscal metrics, the market consensus was for a 2018 MTBPS-type of profile. The market’s reaction to such a disappointing fiscal trajectory will likely be sharply negative for the rand and bond yields, with the possibility of a credit rating downgrade firmly back on the table.
  • The real GDP growth estimate has remained unchanged at 0.7% for 2018/19 but revised lower over the MTEF by between 40-50bps per year. The current estimates are marginally worse than our own forecasts. Nominal GDP is now R50 billion lower (cumulatively) over the next three years.
  • Tax revenues have been revised significantly lower: Gross tax revenue estimates are R32 billion lower over the forecast period. Tax revenues for the current year were R15.4 billion lower than the 2018 MTBPS forecasts as a result of a R7 billion undershoot each in PIT and CIT collection and marginally lower VAT collection. Corporate tax collection was revised down by more than R30 billion over the forecast period as a result of the lower growth estimates. This is over and above the R31 billion undershoot reported in the 2018 MTBPS. Importantly, current revenue projections assume no new tax hikes. NT has limited any fiscal measures that could harm growth.
  • New expenditure allocations amount to R75.3 billion over the MTEF, and funded partially by baseline reductions elsewhere: while real growth in expenditures were kept unchanged at 2% per anum, we see inevitable increases in the expenditure ceiling over the MTEF as a result of support for Eskom to the tune of R23 billion per year. NT remains committed to the expenditure ceiling policy. However, the ceiling was raised by R16 billion over the MTEF, while total expenditures are forecast to be R11 billion higher than 2018 MTBPS estimates. The bulk of the spending is allocated to learning and culture, social development, health and community development.
  • Eskom provided with R23 billion financial support as it implements its turnaround plan: this was the single biggest upside driver of baseline expenditure, however the Minister has indicated that government will not absorb Eskom debt – these funds will be used to establish an independent transmission company within Eskom which will focus on a reconfiguration and re-engineering process, in combination with the broader turnaround plan.
  • Because of the significant revenue shortfall and expenditure overshoot, deficit and debt compression has been pushed out yet again: The main budget deficit as a % of GDP is now projected at 4.4% for 2018/19 (vs. 4.3% in the 2018 MTBPS, 3.8% in the 2018 Budget), and 4.7% and 4.6%, respectively, for the following two years (vs. 3.8% and 3.7%, respectively, in the 2018 Budget). The deficit for 2021/22 is expected at 4.3%. This means that the deficit as a % of GDP widens by an average of 0.2% over the MTEF (relative to 2018 MTBPS).
  • The consolidated budget deficit does not compress below 4% of GDP over the MTEF: The deficit projection rises to 4.2%, 4.5% and 4.3% in 2018/19, 2019/20 and 2020/21, respectively (vs. 3.6%, 3.6% and 3.5%, respectively, in the 2018 Budget). For 2021/22, the consolidated deficit remains large at 4.1% of GDP. While the primary budget deficit is expected to narrow, it is not expected to close over the MTEF. Deficit compression is only forecast to materialise in 2021/22. We believe this is mainly as a result of elevated nominal and real growth assumptions that may not materialise.
  • Debt-service costs have risen by R3bn over the MTEF: The wider main budget deficit, currency depreciation and higher interest rates have raised this expense. NT estimates upside risks to the DSC to the tune of R7.3 billion in 2019/20 alone. Debt to GDP projections rise sharply over the MTEF: gross loan debt will rise from R2.8trn (55.6% of GDP) in 2018/19 to R3.7trn (58.9% of GDP) in 2021/22. The Debt to GDP ratio is only expected to stabilise at 60.2% in 2023/24 (prev. 59.6%). This compares unfavourably to 2018 Budget projections, which saw the ratio remaining below 56% over the MTEF and beyond. The ratio is also 40bps higher than the 2018 MTBPS projections. Here again we see NT kicking the can down the road in that it only expects the debt-to-GDP ratio to stabilise or decline only in 2024/25. We believe the possibility that Moody’s will move South Africa to a negative outlook (from a stable outlook) is high. NT projects higher short-term T-bill issuance in 2019/20 as a result of the higher funding requirement (larger deficit). The 2019 Budget details that T-bill issuance will rise from R8.25 billion per week, to just over R9 billion per week in the new fiscal year. Furthermore, nominal bond issuance will rise from R216 billion, to R254 billion over the medium term.
  • The 2018 MTBPS estimated nominal bond issuance of R163 billion (domestic long term loans less redemptions) for 2018/19. The 2019 Budget estimates nominal bond issuance of R168 billion – for the FYTD to January2019, total issuance was R147.5bn. Hence, at the current pace of issuance (R3.5bn per week, plus average non-comp of R0.6bn, five weekly auctions remaining), the NT would raise R168bn in 2018/19 in long-term debt (excluding discounts). This however assumes the average non-comp take-up, which has been erratic this year, as well as assumes no discounts or premiums paid. We believe NT may raise issuance marginally for the current fiscal year given the uncertainty in assumptions in meeting its financing obligations.


Find full presentation here: 

Budget Breakfast v2