Mboweni’s Budget Speech, where does it leave us?
“Is it all thumbs up for Mr Tito Mboweni’s budget speech – only time will tell”, this is according to Yolanda Naude, the guest speaker at the KLCBT Budget speech hosted by Stabilis Inc and Citadel last week.
The Arena at Emnotweni was packed with over 200 guests, eager to learn what this very interesting budget speech will mean for us in the Lowveld, and then some more who came to learn more about alternative energy solutions. A great part of the budget speech dealt with Eskom’s failure to gain traction. The concern of business people is three-fold: Inconsistent supply with loadshedding happening unpredictably, inconsistent price increases where you cannot plan for the future, not even a few months in advance due to unexpected and unacceptably high tariff increases and lastly, the non-payment from municipalities can lead to electricity being cut off altogether. Businesses have no choice but to somehow mitigate this substantial risk in their operations. These presentations and exhibits were extremely valuable and pointed out that going off the grid is much more affordable than you might think.
Back to the economy.
The global economic recovery continues and it is one of the longest recovery periods we’ve seen, it is at an extremely slow pace and now we have the added issue of the Corona virus which will slow down the stronger economies substantially. In South Africa, our economic outlook remains weak due to a long history of structural impediments. Low quality education lead to
“Is it all thumbs up for Mr Tito Mboweni’s budget speech – only time will tell”, this is according to Yolanda Naude, the guest speaker at the KLCBT Budget speech hosted by Stabilis Inc and Citadel last week.
The Arena at Emnotweni was packed with over 200 guests, eager to learn what this very interesting budget speech will mean for us in the Lowveld, and then some more who came to learn more about alternative energy solutions. A great part of the budget speech dealt with Eskom’s failure to gain traction. The concern of business people is three-fold: Inconsistent supply with loadshedding happening unpredictably, inconsistent price increases where you cannot plan for the future, not even a few months in advance due to unexpected and unacceptably high tariff increases and lastly, the non-payment from municipalities can lead to electricity being cut off altogether. Businesses have no choice but to somehow mitigate this substantial risk in their operations. These presentations and exhibits were extremely valuable and pointed out that going off the grid is much more affordable than you might think.
Back to the economy.
The global economic recovery continues and it is one of the longest recovery periods we’ve seen, it is at an extremely slow pace and now we have the added issue of the Corona virus which will slow down the stronger economies substantially. In South Africa, our economic outlook remains weak due to a long history of structural impediments. Low quality education lead to a lacking skillset which lead to weak productivity growth. This, combined with weak local and foreign private sector fixed investment growth, structural challenges and policy uncertainty brought us to a condition where the economic growth per capita is less than the population growth. High and rising unemployment, rising crime levels and social unrest is a result. Again, combined with weak SOE’s, poor service delivery and bailouts with no apparent results continues to grow the fiscal deficit and debt and we are left with no room for counter-cyclical support.
So, is it all thumbs up for Tito’s budget?
He missed a vital opportunity to build a financial cushion by increasing taxes slightly, but he reduced taxes. The reduction will not really make a significant difference to pay-checks, but it could have meant a great deal in the income of the state. It could have built a financial cushion with the potential to offset challenges arising from the public sector wage bill negotiations. He reigns in expenditure with the cut of the civil servant wage bill by R160 bn (R38bn in 2020/21 is not agreed yet…) and the cut of R100bn in grants for provinces and municipalities which is counterproductive to the state of infrastructure, service delivery and economic growth. On the positive side, the budget itself presented more realistic economic growth forecasts, a willingness to take on the massive wage bill drain, continued support for inflation targeting and an independent Reserve Bank, a notable focus on cutting wasteful expenditure, addressing the severe youth unemployment problem and the wage freeze / cuts will be deflationary and more interest cuts by the Reserve Bank will have to follow. The big concern regarding the budget speech is that it is largely a bold and high-risk move by the finance minister and the success of this plan rides solely on the government’s ability to negotiate wage freezes with the unions. Will it succeed? All eyes are on this issue for the next few months going forward. In the World Economic Forum’s Global Competitiveness Report for 2019 shows that South Africa currently ranks 139th out of 141 countries for cooperation in labour-employer relations. This is terrible for prospective investors. One wrong move and the debt to GDP ratio will increase. The R60 billion for Eskom and SAA will hurt us and then there are the idealistic sovereign wealth fund and state bank, why? They are unrealistic give the current fiscal state, so one has to ask if this is purely to entertain political agendas.
Is there good news?
Certainly – South African can be proud of a highly developed financial system, an impressive services sector, a flexible exchange rate, a credible and strong reserve bank, low foreign currency debt liabilities and enough access to foreign capital. Looking at the Global Competitiveness Report again, South Africa ranks number one in the world on Budget Transparency, 7th on road connectivity, and very importantly, 29th on soundness of banks – great news for prospective investors. We have made great strides in terms of structural reform issues, such as: SARS is being rebuilt, there is some further clarity on mining regulation, the pesky visa restrictions were eased for tourists, there is some positive movement on broadband spectrum, there is the deregulation of the energy industry to reduce reliance on Eskom, the ease of doing business is improving a bit with water licences taking 90 days to obtain vs 5 years previously and company registrations can be done in one day, and R2,8bn state capture waste was recovered thus far.
Are we getting the foreign investment the President is targeting?
Mr Ramaphosa boldly announced that SA will attract US$ 100 bn in Foreign Direct Investment by the year 2023. This is roughly 27% of the size of our economy! It will certainly make a huge difference. Where are we with this? In 2018 there were pledges of R300 bn and 2019 R370bn. If you look at the slump in foreign investment that came about around 2015, with its lowest point in 2017 with only $1,3bn, 2018 showed $7,1bn in foreign investment. This is a vast improvement and there is nothing like a success story to attract more investors. Looks like we are cashing in on all the trips around the world…
All eyes are now on Moodys’ reaction to this budget speech. Will it be enough to avoid a downgrade? Will they “reserve judgement” to see the progress on the negotiations of the government wage freeze? Dr Roelof Botha will address us on 2 April regarding the reaction of Moodys and the specific impact it will have on the economy.
Meanwhile all attention has shifted to the Corona Virus…
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