Investment banking firm BNP Paribas has released its latest economic research note, entitled ‘South Africa MTBPS: Details matter’,off the back of Finance Minister Tito Mboweni’s medium-term budget speech. South African citizens and investors are looking for structural reforms that will bolster economic growth and create much-needed jobs. Many were disappointed by the outcome of the much-anticipated speech, calling it a complete “non-event“. However, BNP Paribas describes it as “market neutral” and says it’s not a game changer for South African assets and investment. – Claire Badenhorst
South Africa MTBPS: Details matter
By Jeffrey Schultz, Burak Baskurt, Nicholas Borain*
South Africa’s mid-term budget was a mixed bag, but on balance, should be viewed as market neutral, we think. Non-interest spending was revised higher, though this seems more realistic and is counterbalanced by a focus on infrastructure away from consumption (wages). An additional diversion of state funds towards SAA is probably the most negative element of the MTBPS – more details are now required in securing a private majority shareholder to avoid further credibility losses. Long-term debt sustainability remains the biggest issue, with the MTBPS’ implementation once again reliant on the ability of policymakers to boost growth.
The fiscal tightrope that South Africa’s National Treasury (NT) continues to walk, promises to get trickier as the details and risks of the medium-term budget policy statement (MTBPS) are digested.
A mixed bag: With the NT’s average revenue expectations more or less in line with the guidance given in the June adjustment budget (in line with our thinking), the focus was always going to be on the expenditure side of this budget update (see South Africa MTBPS: In pursuit of spending cuts, published on 8 October). Figure 1 shows that while the NT has taken a harder line on compensation budgets over the medium-term, it revised its non-interest expenditures up by a cumulative 1.4% of GDP in FY21/22 and FY22/23. However, the composition of this higher expenditure matters.
We believe the MTBPS is not a major game changer for South African assets. We recently took profit on our long ZAR trade idea, but continue to believe stronger external accounts will support the ZAR. Regarding rates, the MTBPS confirmed our view that the issuance pace will not increase further and technical pressure on rates will stabilize going forward. We have also taken profit on our FRA flatteners, but we continue to keep South Africa as overweight in our model portfolio.
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