This is the view of Old Mutual Investment Group following the Medium-term Budget Policy Statement on 28 October, where it was announced that Treasury’s GDP growth forecast has been revised to a contraction of 7.8% in 2020 compared to -7.2% forecast in the June budget, but it expects a rebound to 3.3%Y in 2021 compared to 2.6%Y in June, followed by 1.7%Y in 2022, compared to 1.5%Y in June. The consolidated Budget balance is expected to decline from -15.7% in 2020/21 to -7.3% by 2023/24.

Chief Economist, Johann Els, said that while Treasury has encouragingly strengthened the proposed Wage Bill cuts, slippage in planned non-wage expenditure cuts from the June Supplementary Budget raises serious concerns about whether SA will be able to avoid a fiscal cliff.

“The risk we are facing as an economy is highlighted in the abandonment of the active scenario that was presented in June as the only way to avoid a debt trap,” explains Els. “With the debt ratio expected to peak even higher (95% vs 87.4% in June) – and with clear upside risks – the fiscal cliff is getting ever closer.”

He adds that while the MTBPS overall was disappointing, Government’s fiscal consolidation intent still appears clear, which should calm the markets.

“The February Budget proposed R160bn in wage bill cuts and the June Budget added R230bn in cuts in non-wage non-interest spending, thus a total of R390bn. But the MTBPS leaves total cuts now of only R306bn,” points out Els. “This MTBPS reduced the proposed non-wage, non-interest spend to decline by only R68bn, which means that the bulk of proposed expenditure savings is set to come from Wage Bill savings, which will see a total of R238bn of savings – R160bn as announced in February of an additional R78bn. Government plans to freeze public sector wages for the next three years.”

When it comes to the revenue announcements, Els believes that fiscal consolidation is not unduly premised on optimistic revenue forecasts or extra tax hikes. “The Minister has made a clear statement that tax increases are not part of the solution,” he highlights. “This is very conservative revenue budgeting, providing scope for revenue outperformance. There was also no mention of extra revenue streams such as the sale of spectrum or potential overshoot of mining taxes.”

Zain Wilson, Old Mutual Investment Group Investment Strategist, believes that as we move out beyond the recovery in the next 12 months, asset allocation will be guided by how relative valuations have shifted, as well as changes in the global environment and our assessment of how successful Government is in executing their plans announced in the MTBPS to rein in spending and implement policies to support the economy’s growth potential.

“We expect the improving global environment to be the dominant theme driving domestic assets over the next 12 months. We are already seeing feedthrough into better export performance – in the mining sector, in particular, which maintains strong linkages to both fiscal performance and the rest of the economy,” he says. “This should support domestic fundamentals – better growth off of a low base, improving external balances, revenue collection and sustained low and stable inflation.”

However, he warns that this perspective is vulnerable to any policy shifts to the left which may reset the price investors pay for those fundamentals lower. “But, we are broadly happy that Government’s response to the crisis has been a shift in the direction of reform, as opposed to populism, thereby reducing the risk,” says Wilson. BM