巴黎银行-新兴市场-宏观策略-南非MTBPS预览：取舍之时-20181016-9页_1mb

South Africa MTBPS Preview – Time for Trade-offs

Core Content Summary

This report provides an analysis of South Africa's upcoming Medium-Term Budget Policy Statement (MTBPS) scheduled for 24 October 2018, focusing on fiscal consolidation efforts, expenditure reprioritisation, and the implications for the country's credit rating.

Key Messages

• No Nasty Surprises Expected: The 24 October MTBPS is unlikely to reveal significant surprises, with the newly appointed finance minister, Tito Mboweni, expected to reaffirm fiscal prudence.
• Fiscal Consolidation Path: The Treasury aims to maintain a medium-term fiscal consolidation trajectory, targeting a deficit of 3.5% of GDP by FY2021-22 and a gross debt-to-GDP ratio below 60%.
• Primary Budget Balance by 2020/21: Achieving a primary budget in balance by FY2020-21 is seen as a 'non-negotiable' condition to avoid an adverse rating outlook from Moody's.
• Revenue Outlook Remains Fragile: Despite a 11.2% year-to-date increase in tax revenues, corporate income tax (CIT) collections have underperformed, reflecting weak corporate profitability and investment trends.

Revenue Outlook

• Resilient Tax Revenues: Tax revenues have shown resilience, with VAT and personal income tax (PIT) performing well, partly due to extended tax return deadlines and improved SARS leadership.
• Corporate Income Tax Weakness: CIT collections are up only 2.8% year-to-date, indicating ongoing challenges in corporate profitability and investment.
• Revenue Challenges: The overall tax buoyancy remains fragile, with the National Treasury's assumptions seen as overly optimistic given macroeconomic pressures and subdued inflation expectations.

Expenditure Reprioritisation

• Stimulus Plan: President Ramaphosa's stimulus plan aims to shift ZAR50bn from underperforming programs to infrastructure spending, particularly in local and provincial government.
• Local Government Focus: A significant portion of the reprioritisation is expected to target local government, where inefficiencies and wasteful spending have been a concern.
• Service Delivery Improvement: The push for infrastructure spending is motivated by the need to improve service delivery ahead of the general elections in Q2 2019.
• Challenges in Efficiency: Improving local and provincial government efficiency will be difficult and time-consuming, requiring stricter oversight of conditional grants and adherence to legal frameworks.

Deficit and Debt Projections

• FY2018-19 Deficit Slippage: The main budget deficit is expected to rise to 4.2% of GDP, up from the previously estimated 3.8%.
• Medium-Term Deficit Trajectory: The deficit is projected to narrow to 3.5% of GDP by FY2021-22, maintaining the consolidation path outlined in February's budget.
• Debt Management: The gross debt-to-GDP ratio is expected to remain below 60%, with the Treasury likely to use switch auctions to manage the funding gap without increasing long-term debt issuance significantly.

Moody's Rating Outlook

• Rating Decision Pending: Moody's has not yet announced its rating decision, with the decision likely to be delayed until after the MTBPS.
• Stable Outlook Likely: If Mboweni delivers a balanced approach between investment and growth-enhancing expenditure shifts while maintaining fiscal discipline, Moody's may keep its stable outlook on South Africa's sovereign rating.
• Rating Risk: Any meaningful deviation from the projected fiscal path could lead to an adverse rating action from Moody's.

Funding Strategy

• Domestic Issuance Plans: Higher deficit numbers may lead to increased domestic bond issuance, though the Treasury is expected to use switch auctions to manage the funding gap.
• Switch Auctions: These auctions are preferred for their ability to diversify issuance and manage refinancing risks, though they may increase debt service costs due to higher premiums.

Legal and Compliance Notes

• Non-Independent Research: This document is non-independent research and is intended for professional clients and eligible counterparties.
• Confidentiality: The information is provided on a strictly confidential basis and may not be reproduced or distributed without prior written consent.
• Disclosures: The report includes important disclosures regarding options, ETFs, and convertible securities, noting the potential for conflicts of interest and the risks involved in trading these instruments.

Conclusion

The South African government faces significant fiscal and macroeconomic challenges in the near term, but the Treasury is expected to maintain its medium-term consolidation path. The focus on reprioritising expenditure, particularly in local and provincial government, and improving tax revenue collection efficiency are critical to achieving fiscal stability and avoiding a rating downgrade. The outcome of the MTBPS will be closely watched, especially by Moody's, as it could influence the country's credit rating outlook.