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2019 National budget review

Momentum  |  27 February 2019

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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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