What to expect and how to trade the mini budget speech

South Africans will be eagerly awaiting the upcoming Mid-Term Budget Speech in the wake of an increasing burden of State-Owned Enterprises on National Treasury’s budget, as well as growing twin deficits within the country. In this article we look at what to expect at the meeting, as well as how the rand is setting up leading into the event.

When is the Mini Budget Speech?

The Medium-Term Budget Policy Speech (MTBPS) will take place on the 30^th of October 2019 as confirmed by National Treasury (on Tuesday the 22^nd of October 2019). The date is a shift from the meeting previously scheduled for the 23^rd of October 2019, moved in lieu of accommodating international work commitments of the Minister of Finance, Tito Mboweni and South African President Cyril Ramaphosa.

What to expect from the Medium-Term Budget Policy Speech?

The MTBPS will update February’s budget, outlining the policy framework for 2020, highlighting any adjustments to be recommended to parliament relative to current expenditure plans.

National Treasury continues to realize tax shortfalls, despite recent efforts to increase collections. Economic conditions remain depressed, placing a drag on both corporate income tax as well as VAT revenue. The forecast for economic growth in 2019 is expected to remain at around 0.6% for the current financial year.

While collections have been weak, State Owned Enterprises, particularly Eskom (and to lessor but still large extent SAA and SABC) continue to be an increasing draw on South Africa’s fiscus. Mr Mboweni is likely to have to revise the budget deficit estimate of 4.5% (communicated at the last meeting) to around 6% for 2019.

What will happen to Eskom?

Eskom continues to be a hinderance and a threat to the domestic economy as it draws more and more funds from the country’s fiscus. In February’s budget speech, it was announced that Eskom would receive R69bn in bailout funds over the course of three years. Since the meeting, Treasury has had to allocate an additional R59bn over the course of two years for Eskom to run as a going concern.

Eskom was granted the right for tariff increases of 9.4%m 8.1% and 5.2% for 2019/2020, 2020/21 and 2021/2022 periods respectively. However, the ailing power utility had requested 17.1%, 15.4% and 15.5% tariff increase over the next three years to help the State-Owned Enterprise (SOE) address it’s increasing debt obligations.

Mr. Tito Mboweni will need to address the Eskom worrisome debt burden and guide towards any further provisioning, a provisioning which has nearly doubled in the six months which followed the last address. Furthermore, the president has suggested that the meeting will provide further plans relating

A credit rating downgrade?

Moody’s Investor relations, the last major rating agency to hold South Africa’s local credit rating at investment grade and is set update its credit review on South Africa shortly after the MTBPS. Fiscal consolidation remains of the utmost importance and the ratings agency will be looking to see efforts towards improving revenue collection whilst containing expenditure. There has also been the suggestion from president Cyril Ramaphosa that the MTBPS will offer further information regarding the turnaround strategy at Eskom (as well as SAA and SABC).

Moody’s has recently reaffirmed South Africa’s local currency credit rating at one notch above sub investment grade with a stable outlook. Failing any disastrous surprises, it is expected that South Africa debt will remain at investment grade upon review, with a minor chance of a downgrade to the outlook from stable to negative.

USD/ZAR technical analysis overview

The USD/ZAR has been trending lower (dollar weakness/rand strength) over the last few week’s leading into the MTBPS meeting. The move lower has come from overbought conditions on the USD/ZAR, aided by a generally improved global risk appetite on the suggestion of progress in US China trade talks. While the catalyst for the short-term rand strength has been from factors external rather than those domestic, the Mini Budget Speech and ratings review to follow do still hold the potential for an increase in short term volatility to reflect in the ZAR.

The USD/ZAR is technically oversold near the R14.50/$ support level. Should a rebound ensue, R15/$ becomes the initial upside target from the move. The suggested technical rebound would be deemed to have failed on a close below the R14.50/$ support level, in which case R14.30/$ would become the near-term downside support target.