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RIP: Tito Mboweni’s 2020/21 Budget, gone the way of the dodo

Is Covid-19 an ‘extinction-level event’? Well, Finance Minister Tito Mboweni’s 2020/21 Budget has now gone the way of the dodo and the dinosaurs. It can officially be declared extinct.

Finance Minister Tito Mboweni’s Budget is among the casualties of the coronavirus pandemic. It is now dead and buried, and no-one knows what is going to replace it given the dramatic turn of events.

Peter Attard Montalto, Head of Capital Markets Research at Intellidex, has just revised his outlook for South Africa’s economy and it makes for exceedingly grim reading:

“We see growth possibly printing at -2.3% in 2020 through with downside and longer tail risks – this is just based on the policy choices of government so far announced this week. Under such a scenario the deficit would leapfrog to around -10.8% GDP in the coming fiscal year and debt to GDP to 74% (81% in the outer fiscal year).

“This would require an additional 36% increase in issuance … Policy options are limited and South Africa has few options, in reality, to alter the trajectory except to smooth around the edges and ensure a fast bounce back. The risk of liquidity sudden stops is significant into SOEs [state-owned enterprises], especially in this environment. South Africa is entering an exceedingly risky environment and is at the fiscal cliff edge,” he wrote in a note on Wednesday, 18 March 2020. 

The budget recall was unveiled to much fanfare just three weeks ago – it almost seems like a lifetime ago now. Economic growth for 2020 was then projected at a sluggish 0.3%, while the budget deficit for the upcoming financial year was put at 6.8%. These forecasts are now effectively meaningless. 

Montalto warns that we must be “… on the watch-out for market funding and SOE shocks – for instance, a sharp drop in Eskom revenue on lower usage”. That lower usage is to be expected when (not if) the economy contracts sharply. The silver lining here might be a reduction in load shedding – if Eskom crews can still carry out the maintenance that is required. 

Virág Fórizs, emerging markets economist with Capital Economics, had the following to say: “We expect an even deeper fall in activity in Q2. The rapid pace of developments makes it difficult to forecast with any degree of certainty. However, assuming that tourist arrivals fall sharply and domestic consumers’ delay non-essential purchases, we estimate that output will probably contract by around 10% q/q before rebounding later. We’ve cut our full-year forecast to a fall of about 3%.” 

A 10% contraction would be a depression if it persisted. This is the kind of thing which happens during civil wars and other cataclysmic events, which is what is unfolding at the moment. 

Expect these and other forecasts to be revised in the days and weeks ahead, and most likely on the downside. The only thing that is certain at this stage is that the economy is in for a steep contraction, and with it many of the assumptions in the budget that was tabled late in February 2020 – that pre-crisis era when rooms could still be filled and flying was a non-issue in most of the world. 

That brings with it a host of uncertainties at this stage. How far will SARS fall behind in its tax revenue collection targets? Can the public sector wage bill be brought significantly down in the wake of the collective hardship that is about to befall South Africa? What yields will risk-averse investors expect for holding South African debt? How many more downgrades into the depths of junk status will South Africa suffer? 

Also, what SOEs will survive this extinction-level event? Mboweni’s budget is not the only thing that is going to follow the dodo down the path of extinction in the wake of this pandemic. BM

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