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MTBPS focus: no negative surprises

12 Nov 2021

Finance Minister Enoch Godongwana's first significant speech since his appointment in August 2021 saw a minimal reaction from the equity market. Good news had been expected from the Medium-Term Budget Policy Statement (MTBPS) and the market signalled its satisfaction that there were no negative surprises, such as alluding to tax rate increases.

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A modest rally in the bond market saw rates about 10bp lower in the wake of the MTBPS release as the R120.3bn revenue overrun was confirmed and the budget assumptions for the next three years are conservative. The market need not be concerned about higher issuance.

As far as the currency was concerned, the rand had rallied sharply ahead of the speech, so headed into the release at a strong level and saw a muted reaction to the MTBPS itself.

Retained policy stance

The minister made it clear that he would continue the policy stance of his predecessor. This policy continuity is important against a very challenging macro and political backdrop.

Although the MTBPS is not the forum for major policy changes and it is too early to state convincingly that ideology is playing a smaller role, Godongwana maintained the Treasury’s message that government must maintain accelerated reforms to boost growth so that the economy can create jobs.

This will reduce the reliance on the state and ease pressure on the fiscus.

Commitment to fiscal consolidation

In his speech and in the numbers, there is ongoing commitment to fiscal consolidation in a way that does not penalise growth.

There are no indications of tax rate increases.

Rather, reliance is on improving SARS and ability to bring in revenues.

At the same time, there is an effective wage freeze for the next two years, albeit off the higher current level, so there is still the pursuit of consolidation via the wage bill.

The consolidated budget deficit is expected to be 7.8% of GDP in 2021/22, gradually falling to 4.9% in 2024/25, comfortably improved from the 9.3% and 6.3% respectively of the February 2021 Budget.

With reduced fiscal risks in the short term on the back of the revenue overrun, the minister might have been tempted to make populist announcements, but he avoided any such measures.

There is a clear message here that the revenue overrun is a commodity windfall and will not be sustained. This should help to dampen those calls for increasing recurring spending, which will be unsustainable.

Detail and conservatism is welcome

Treasury has, wisely, used very conservative assumptions. GDP growing at 5.1% this year followed by growth between 1.6% and 1.8% for each of the following three years is extremely modest.

Inflation rates of 4.5% and slightly below that are equally conservative. This leaves room for potential upside surprises by the time we get to the February 2022 budget.

Although the modest growth makes the debt ratio and deficit ratio profiles look slightly worse than expected, the detail and conservatism is welcome.