Gordhan's budget will need top-level support

The state of the nation address was full of good intentions but short of new ideas. It served as a reminder of the government's failure to implement policies that have been previously proposed. Plans that are not executed are meaningless.

On a more positive note, Finance Minister Pravin Gordhan will this week deliver his budget speech. It will most probably carry the same message of fiscal consolidation that has been echoed over the past couple of years.

But missed targets or signs of reduced commitment to fiscal consolidation will undoubtedly trigger a sovereign downgrade.

While the medium-term budget policy statement did enough to avert a downgrade at the end of last year, growth initiatives that render the fiscal adjustment less painful and more sustainable are lacking.

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The pace of fiscal consolidation is threatened by growth that is below potential and heightened risk to policy execution stemming from wage pressures, infrastructure underspending and exchange rate pressures.

So rating agencies could easily downgrade the foreign currency sovereign rating.

Uncertainty since the delivery of the medium-term policy statement has intensified.

While the consensus is for an improvement in global growth supported by restocking and reflation, policy uncertainty - particularly the failure to address corporate debt in China and protectionist measures in the US - threatens the outlook.

Domestically, 2016 should have marked the trough in our growth cycle, but the expected improvement in the years ahead still remains well below potential.

High frequency data released to date suggest that mining and manufacturing had a rather disappointing end to the year. However, the PMI suggests that activity in the manufacturing sector should pick up in the months ahead.

The uptick in commodity prices should also incentivise the mining sector. Retail sales were boosted by strong consumer spending towards the festive season.

Furthermore, it appears the worst of the drought is behind us. Agriculture is expected to contribute to economic growth this year.

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While the National Treasury's growth expectations are in line with consensus, 2016 GDP could marginally surprise on the downside. But we do not expect this to have a huge impact on the targets set in the medium-term policy statement.

Fiscal receipts data indicate revenue is growing in line with expectations, thanks to relatively strong VAT and corporate income receipts. In contrast, growth in personal income receipts for the current financial year, on average, has been weak.

Growth in government expenditure is growing faster than targeted. The government has already spent a little over 70% of its main budget allocation.

In terms of taxes, the proposed R28-billion in additional tax announced in the medium-term statement will likely be achieved through fiscal drag and the usual fuel, alcohol and tobacco "sin taxes".

We are likely to see a sugar tax being implemented along with personal income tax increases that will impact high-income earners. We doubt that a VAT hike is an option at this point.

The speech will on balance be ratings neutral; there is no doubt that the Treasury remains committed to fiscal consolidation and maintaining credit worthiness. The bigger question is whether it has the requisite support.

Nxedlana is FNB's chief economist