IN THIS WEEK’S BOTTOM LINE
CONTRIBUTED BY NICK DOWNING| OVERBERG ASSET MANAGEMENT
While financial markets celebrated the business- and economy-friendly budget, posting gains the same afternoon of 6% or more in many of the bell-weather SA-Inc shares, a 10 basis point decline in the 10-year government bond yield and a 1% appreciation in the rand versus the dollar, impressive feats amid the coronavirus turmoil, analysts remain sceptical.
Even perennial optimists had begun to give up hope that South Africa’s government could stop scoring own goals. The JSE is littered with erstwhile blue-chip companies which are now priced as though they are expected to go bust. Look at Growthpoint, the blue-chip in the real estate sector. Having traded at a distribution yield of under 7% just five years ago, it now trades on a yield of 12%, a whole 225 basis points above the prime rate. The bond markets are equally dismal, with the 10-year government bond yield a whole 200 basis points above the equivalent Brazilian bond yield, despite the latter already excluded from global bond indices on account of its non-investment grade rating. We still have an investment grade rating from Moody’s, just, but the markets are telling us it won’t be for long.
Tito Mboweni came to the rescue, again. Against all expectations, which according to consensus view had predicted yet more tax hikes and yet more state expenditure, in line with the socialist leaning budgets of the past five years, Mboweni’s budget was a business-friendly reflationary budget. Margaret Thatcher would have been proud. The Zuma faction in parliament looked grief-stricken. And for good reason.
The budget allocated an additional R2.4 billion in the 2020 budget for the National Prosecuting Agency, Special Investigating Unit and the Hawks. The funds will facilitate the appointment of 800 investigators and 277 prosecutors, and the establishment of five additional specialised commercial crimes courts, one in each province. State capture is estimated to have cost the economy around R400 billion per annum, a similar figure to Eskom’s R450 billion debt. The R2.4 billion budget allocation to fight corruption could provide one of the best available returns on investment.
Rather than raise taxes, either by stealth or outright tax rate increases, as the economy has become accustomed to, Mboweni resisted the temptation. He understands that any further tax increases would result in lower actual tax revenue due to the impact on economic activity. The budget gave back R14 billion in tax relief by adjusting tax brackets to compensate for inflation.
Budgeted expenditure over the next three years fell by R156 billion compared with the 2019 budget predictions. About R100 billion in expenditure will be cut from conditional grants for provinces and municipalities. Encouragingly, the cuts in grants will take account of past performance, targeting municipalities with a poor track record of governance. The saving here will be allocated to state-owned enterprises, with more than half the budgeted R111 billion increase going to Eskom and SAA. The amount allocated to SAA, R16.4 billion in total is to settle the outstanding guaranteed debt and interest.
The bulk of the budgeted expenditure cut comes from a proposed R160.2 billion worth of reductions in the public sector wage bill, comprising R38 billion in 2020/21, R55 billion in 2021/22 and R67.5 billion in 2022/23. This is a bold and impressive pro-business initiative. Despite the last-minute nature of the budget’s wage bill announcement, the immediate fightback from labour unions and a general perception that unions were not consulted, the National Treasury, government and labour have been in negotiation for some time already.
Cosatu in recent months has shown a greater willingness to negotiate than is commonly perceived. They are open to pres. Ramaphosa’s call for a “social compact” and are open to wage cuts provided two key demands are met. Their demands should appeal to all South Africans, namely that government holds those responsible for state capture to account and that government cuts ministerial and managerial benefits. Labour unions may be willing to accept job cuts if others are also made to take some bitter medicine.
While financial markets celebrated the business- and economy-friendly budget, posting gains the same afternoon of 6% or more in many of the bell-weather SA-Inc shares, a 10 basis point decline in the 10-year government bond yield and a 1% appreciation in the rand versus the dollar, impressive feats amid the coronavirus turmoil, analysts remain sceptical. The reason for the scepticism is understandable.
Will Mboweni’s plans be implemented? This is the million-dollar question. Two years into Ramaphosa’s “New Dawn” there is still very little to show in terms of key structural economic reforms. Contrary to the consensus view, we are cautiously optimistic that labour and government will broker an agreement to facilitate the proposed cut in the public sector wage bill. Signs of progress in this regard will provide good reason for Moody’s to postpone its decision to remove South Africa’s last remaining investment grade rating and will result in a gradual but steady pick-up in business and consumer confidence.
Read More: Overberg Market Report 3 March 2020