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The Mini-Budget Speech - Sobering Realistic
On Wednesday, Finance Minister Enoch Godongwana, delivered his Mini-Budget Speech (Medium Term Budget Policy Speech – MTBPS).
Although the mini-budget is never designed to provide extended details like the main Budget Speech in February each year, it shares the overall strategy for the next three years. This year, it was especially significant due to the substantial deterioration in the country’s fiscal health, which resulted in lower tax collections and higher expenses.
The Minister was frank in acknowledging SA’s weaker fiscal position in an improving global environment, where he responded with much emphasis on fiscal consolidation, which will be implemented through spending reductions and efficiency measures across the government. This is certainly not a populist approach based on sound economic principles, and most viewed this honest assessment favourably.
On the positive side, the government achieved a primary budget surplus in 2023/24, for the first time in 15 years. And the market appreciated the increased expectation of growth of 1,8% per annum over the next few years.
Old Mutual Chief Economist Views
Old Mutual’s Chief Economist Johann Els, shares his summary and views:
2024 MTBPS: Fiscal consolidation and growth-enhancing policy reforms are still the main themes, and the first GNU MTBPS was characterized by very conservative budgeting, and as such the eventual outcome will likely be far better.
But National Treasury seemed to continue a pattern of disappointment at the annual MTBPS, and then come up with a better story by the February budget. I cannot get my head around that policy…
Key highlights:
Very conservative budgeting: conservative is good, but overdoing it?
No detail around inflation targeting, except that the Treasury is assessing “the suitability of monetary policy targets”.
More reforms are coming to boost growth and accelerate infrastructure spending by simplifying public-private partnership regulations.
More infrastructure spending, but little detail.
No Transnet support, but money for SANRAL.
Treasury intends to reform social assistance, reiterating that any permanent spending increases must be funded through permanent revenue sources or reprioritization. Seems that the Treasury wants to consolidate social grants and public employment initiatives. Details will come in the 2025 budget.
Details:
Growth forecasts:
· 2024 GDP growth forecast lowered from 1.3% to 1.1%
· 2025 and 2026 growth forecast conservative at 1.7% and 2026 from to 1.7p.a.
· No strong assumptions were made that reform would deliver on growth – again very conservative assumptions.
Revenue: Revenue revised lower in the current year and over the next 2 years (due to downward revisions in economic growth forecasts):
· Current fiscal year revenue revised lower by R22bn.
i. Even better growth over the last 7 months of the fiscal year will likely boost revenue performance in the coming months.
ii. Treasury still assumes only R5bn tax from 2-pot despite SARS’ statement that there has been R7bn received thus far.
Downward revenue revisions of R19bn in 25/26 and R22bn in 26/27.
Expenditure: Expenditure revised higher this year and next
· R19bn increase in non-interest expenditure this year: including R5bn for SANRAL.
· No other SOE monies (including nothing for Transnet despite the Transnet CEO stating to me this week that she is “on her knees” every day in front of the Treasury.
· Interest rate bill revised R6bn higher – they did not explain; I would have thought downward revisions in interest costs would be more likely given lower interest rates.
· Higher expenditure numbers next two years (not Transnet, but more for SANRAL (+R13.2bn over 25/26 & 26/27)
· Wage bill: the reopening of early retirement options in the public sector to save wage bills over the longer term. This will initially cost more though (+R11bn in the current and next fiscal years).
Budget balance: Consolidated deficit higher than February’s budget – and contrary to my expectations of a smaller deficit.
· Current fiscal year deficit (consolidated basis) now 5% vs 4,5% targeted in the February budget (and vs my expectations of a 4.3% deficit).
· I still expect the eventual outcome to improve.
· Primary surpluses to continue (+0.5% in 24/25; +0.9% in 25/26 & +1.4% in 26/27.
Debt ratio: revised slightly higher due to higher deficits.
· Debt projections still peak in 2025/26 (as before), at a rate of 75.5% (from 75.3% in the Feb Budget).
Investec Bank Views
If you prefer a more detailed overview, Investec’s Chief Economist, Annabel Bishop, shares her still concise thoughts per the attachment.
This includes where the National Treasury neatly summarises the changes in the national debt forecasts over the last few years as;
Therefore, the overall levels are still far better than feared in the 2020 “COVID-19” Mini-Budget, with a downward trajectory.
IMF Forecasts
To gain some global perspective as to how our Mini Budget speech yesterday ties into the global environment, last week the International Monetary Fund released their global growth projections as;
The IMF has a good past track record of getting these forecasts right, often.
Our Mini Budget speech on Wednesday, saw SA growth forecast for this year revised downwards from 1,3% to 1,1%. Rather interestingly, this was also the IMF forecast for SA. It’s so good to see these forecasts now closely aligned.
If I compare this to our expected investment market returns, there are several relationships between those and these IMF forecasts.
Overall, the world is expected to grow by 3,2% this year and next. However, in the split between Developed and Emerging Markets, they see substantial divergent growth rates.
Developed economies are only expected to grow 1,8% this year, and next, with the US slowing from 2,8% this year to 2,2% next year. Where this is a realistic view, one can also see that this is rather far away from a sustained recessionary environment, specifically in the US.
Emerging Markets in turn, the IMF expects to grow by 4,2% this year and sustain this into next year, and this further supports and highlights the expectation for Emerging Markets, which can be expected to extend into their share markets - and this is supportive evidence that Emerging Markets to be included in a diversified portfolio.
Concluding Thoughts
For certain, the next 10 years will look very different to the last decade.
For us in SA, this isn’t necessarily a bad thing.
The Mini-Budget speech yesterday only a policy framework, it’s pleasing that the books balance, and that the medium-term national GDP growth is now heading upwards.
Overall, even sorting our problems at home with load shedding, corruption, lower inflation and interest rates, and the GNU - the next element needed and dare I say non-negotiable, will be economic growth.
With less than a week until Americans head to the polls, the outcome of the presidential race remains highly uncertain. Adding to this uncertainty, this election cycle has featured several unusual developments.
Firstly, the Democratic nomination was incredibly brief. Within about 20 minutes of President Joe Biden’s announcement that he would not run for re-election, Vice President Kamala Harris was endorsed as the Democratic candidate. This meant that her campaign effectively ran for about three and a half months, far shorter than the typical 18-month campaign.
Secondly, the US appears to be evenly divided between Democrats and Republicans. While the 2016 and 2020 elections were close, the 2024 race is shaping up to be even closer – both nationally and in key battleground states. Just seven states are expected to determine the outcome, with polls in each showing an unprecedentedly close race.
Finally, there is a unique structural challenge: Vice President Harris, a partial incumbent now, must make her case for change while also representing continuity. This has historically proven challenging for vice presidents running after serving with their president. Only once in the past 188 years has a vice president, George Bush in 1988, been elected for president. It appears that voters look for change, which can make the vice presidency a challenging launch pad for presidential ambitions.
Impact on markets
Recent market moves suggest that investors are confident of a Trump presidency, however, this is not fully supported by opinion polls, which are well within historical margins of error. Additionally, the structure of the government is crucial as it influences the president’s ability to enact policy. If there is a divided government, where different parties control the White House and Congress (made up of the Senate and the House of Representatives), policy outcomes will vary significantly. Therefore, the election’s impact extends beyond who wins; it also depends on how the government is structured, adding further complexity
The two extreme scenarios are outlined below:
Republican sweep: Trump would have the freedom to implement inflationary, pro-growth policies that include tax cuts, increased deficit spending and deregulation. Given the recent rises in US equities, bond yields and the dollar, markets may be pricing in this scenario, suggesting that a Republican win could see a more muted market reaction.
Democrat sweep: A Democratic-controlled government would likely pursue higher corporate taxes and increased regulation, which will not be welcomed by equity and currency markets. However, this could be offset somewhat by increased deficit spending and more open immigration policies, while higher taxes could benefit bond markets. This scenario might reverse some of the recent market gains.
Adding to the uncertainty, investors should not expect an immediate election result after voting day. In 2020, it took about four days to call the race for Joe Biden, and a similar, if not longer, delay is likely this time. Even once declared, the 2020 results remained contested until the inauguration, including the 6 January 2021 fiasco.
A prompt, definitive outcome is unlikely for two main reasons:
1. Logistical delays: The surge in pre-election voting by mail has outpaced the vote-counting infrastructure. For example, Pennsylvania and Wisconsin cannot start counting mail-in votes until 7 am on election day, causing delays.
2. Legal challenges: Numerous lawsuits challenging voting practices have already been filed, indicating that the election results are likely to face extensive litigation.
Positioning for stability beyond elections
The policy contrast between the two candidates is stark. And while investors may be tempted to position their portfolios based on election expectations, the race is too close to call. Furthermore, sectors and industries are influenced by a host of other factors, including earnings outlooks, valuations, and economic prospects. These factors are likely to outweigh politics in the long run.
In the short term, sentiment impacts markets, and we have seen some sentiment-driven shifts as election day approaches. Volumes may also dry up as investors adopt a wait-and-see approach, which could amplify the impact of larger trades on markets. However, for long-term investors, policy is impossible to predict, making it challenging to project policy changes onto future earnings expectations. The current third-quarter earnings results have been strong, and management teams remain focused on delivering fourth-quarter results and 2025 earnings. Notably, very few have referenced the election through the latest results season, reflecting their focus on fundamentals, not politics.
The bottom line
As with past elections, we will not take speculative positions in portfolios based on potential outcomes. If Republicans win, market reactions are likely to be muted, if not, we will likely see some short-term repricing. Rather than attempting to guess the outcome, our objective is to ensure that our clients remain invested in quality businesses that can withstand different economic and political environments.
We look forward to an interesting election day and outcome.
Friday Food for Thought
