Rand Report: What Should We Expect from Budget Speech 2019

When is the Budget Speech?

Finance Minister, Mr Tito Mboweni will deliver the National Budget speech at 14:00 on the 20^th of February 2019.

Another tough Budget for 2019

The 2019 budget for South Africa is once again a difficult balancing act as Finance Minister Tito Mboweni, will look to find funds to honour promises made by the president, regarding issues such as education and the national health plan, whilst also making provision for ailing State-Owned Enterprises, encouraging investment and stimulating economic growth, all while trying to preserve South Africa’s investment grade rating.

The Budget Speech, Eskom and Moody’s

As we know, Moody’s Investor Relations remains the last of the major ratings agencies to have South Africa’s local currency denominated debt at investment grade. The budget will be closely monitored by Moody’s who are expected to release their ratings review for South Africa on the 29^th of March 2019.

If the ratings agency was to downgrade South Africa’s credit rating to sub-investment (junk) grade, South Africa would then be removed from the Citi World Government Bond Index, which would equate to the forced selling of SA debt by Index Trackers and asset managers. This would also increase the country’s cost to raise capital.

After the Medium-Term Budget Speech MTBPS (October 2018), Moody’s Investor relations warned that increased government expenditure amidst slow economic growth was a credit negative for South Africa.

Moody’s has also repeatedly flagged its concerns over debt laden State-Owned Enterprises (SOE’s) and their burden on South Africa’s fiscus, most notably Eskom, SAA, the Post Office, SABC & Denel (to name but a few) .

President Cyril Ramaphosa has indicated that the budget speech will contain detail of a bailout for Eskom which is not to add “unmanageable pressure” on the fiscus.

It does however seem unlikely that government will be able to curtail expenditure to reduce the budget deficit, especially when making provisions for SOE’s, especially Eskom. Government will then need to raise further funding from the debt market which further raise the country’s debt to GDP.

These factors will be credit negative for the country and it is possible that Moody’s will review their outlook for South Africa’s sovereign credit from stable to negative, roughly a month after the budget speech. If this scenario does manifest, extra pressure will be placed on the Mid Term Budget presented in October 2019, where Moody’s is again scheduled to review South Africa’s sovereign credit rating and unless there are signs of improvement, South Africa could see itself losing its investment grade status with the agency.

What tax increases can we expect from the budget speech?

The expectation is that after last year’s increases, there will be no further increases in VAT, dividend, corporate & personal income taxes for the year. Instead we are likely to see marginal increases in excise (sin) taxes, estate taxes and slightly more aggressive hikes in the general and RAF (Road Accident Fund) levy’s on fuel. A combined general fuel and RAF levy could see an increase of as much as 50c per litre (20c and 50c respectively). There is also the possibility of an increase in the securities transfer taxes in an attempt to target increased provisioning from the wealthy.

The Previously delayed implementation of carbon emission taxes is scheduled to commence 1 June 2019.

USD/ZAR performance

The USD/ZAR has rallied off the R13.20/$ low to find trend line resistance at the R14.25/$ mark. A rebound in the USD and concerns about the state of South Africa’s power utility (Eskom) have been among the catalysts for the move. Should the USD/ZAR move to close above the R14.25/$, then R14.70/$ becomes a short-term target for the currency pair.