Jeff Schultz | Senior Economist | BNP Paribas South Africa | mail me |
Budget 2022 was a ‘read between the lines’ event and should be interpreted with cautious optimism, we argue. Much weaker GDP inflation assumptions allowed the National Treasury to downplay future revenue collections, yet still bring the primary budget back into surplus a year earlier than originally planned, in line with our view.
While broader trends to curb bloated state spending were largely maintained, the budget also moved to ease the burden on the most vulnerable in society, which is likely to silence ANC critics from the left.
Less bullish revenue assumptions mean that the short-term benefits for South Africa Government Bonds (SAGBs) are more limited (for now) through a seeming reluctance to reduce issuance and preference to keep building contingency buffers.
Prudence still the favoured approach
Overall we see scope for a faster fiscal consolidation trajectory than the National Treasury has pencilled in over the medium term, which ultimately should continue to prove supportive for the local bond market.
Emulating its prudent approach to future revenue gains as displayed in November’s medium-term budget, Finance Minister Enoch Godongwana’s maiden national budget stuck to the script, maintaining that ‘difficult and necessary trade-offs’ are required to ensure long-term growth and fiscal sustainability.
Twin pronged strategy
The Treasury’s strategy in Budget 2022 was twofold, we believe: (i) Choosing to understate the extent of revenue upside so as to avoid growing political pressure to spend more; and (ii) Balancing spending needs to where fiscal multipliers for the economy are greatest, while at the same time stressing that additional (permanent) social protection measures will require other financing mechanisms (taxes) to ensure they do not worsen the country’s fiscal position.
Hesitance to cut issuance for now
As we flagged in South Africa budget 2022 preview: Sticking to the plan, dated 15 February, a reluctance to reduce bond issuance right now will come as a disappointment to SAGBs, though we maintain that the bigger picture is still one that is likely to be supportive for local bonds in 2022.
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