Which eggs will Mboweni have to break in medium-term budget policy statement?

Ian Matthews‚ head of business development and special projects at Bravura‚ an independent investment banking firm specialising in corporate finance and structured solutions‚ gives insight on some of the key issues that could be covered in the upcoming medium-term budget policy statement (MTBPS).

Next week finance minister Tito Mboweni will be delivering the budget policy statement, which becomes a more daunting prospect each year.

In SA’s shrinking economy, where unemployment is at a 14-year high of 27.7% (or 37.2% if the definition of unemployed is expanded to include those too discouraged to look for work), and GDP has been revised downward to 1.2% by the Reserve Bank (or 1% according to predictions by the World Bank), there is very little wiggle room for fiscal policy to support growth.

In light of this the question is: which eggs must be broken by the MTBPS 2018 to make the omelette?

State-owned enterprise bailouts?

Government has significant exposure on state-owned enterprise (SoE) guarantees and must be prepared to provide further bailouts to prevent loan defaults. This presents a critical challenge given that government can ill afford to increase its current debt burden of R246bn which is equivalent to over 50% of GDP.

Treasury has denied that it has approved a proposed bailout package of R59bn for SoEs. It will be hard-pressed to choose which SoEs should be bailed out given widespread mismanagement and wasteful and irregular expenditure. If any further evidence was needed to support this‚ it could be found last week Friday when 11 government departments and entities missed the statutory deadline to table their 2017/18 annual reports in parliament.

Two months ago both SA Express and arms manufacturer Denel joined the ranks of SoEs such as SAA‚ Sanral‚ Sapo‚ the SABC and Eskom looking for bailouts. Both are already reliant on government guarantees to remain operational.

Cash-strapped Denel — whose government-guaranteed debt of R2.7bn was due to be refinanced by the end of September — awaits approval of an additional R1bn guarantee it has requested from government‚ which remains under consideration until next week’s budget policy statement. The lack of further capital puts its cash flow at risk. Domestic and regional airline SA Express requires a minimum bailout of R1.74bn and hopes for its government-backed loans to be converted into equity.

These two will have to line up behind the likes of Eskom‚ SA’s biggest recipient of state loan guarantees which currently has R399bn of debt and is‚ according to the Goldman Sachs Group‚ “the single biggest risk to the country’s economy.”

Tax — between a rock and hard place

While the MTBPS is not expected to make any material changes to the tax regime‚ it could provide an indication of changes to come in 2019.

In February this year‚ then finance minister Malusi Gigaba projected that the SA Revenue Service (Sars) would collect R1.345-trillion in taxes to ensure that the budget balances. Two months later his replacement‚ Nhlanhla Nene‚ announced that Sars had fallen short by R700m in the tax revenue collection target for 2017.

A Sars commission of enquiry in August has learned that the agency inflated compliance figures for corporate and personal income tax‚ which raises questions as to whether Sars truly collected the claimed R1-trillion in revenue in the 2017-18 tax year.

The unwelcome news that the country is in a technical recession this year will no doubt have an impact on tax recovery.

Should there be a tax shortfall there is the possibility that a VAT increase might again be on the cards for next year. Although any further increase beyond this year’s 1% have been described as disastrous given that once again the poor will be the hardest hit‚ there remain few options for Mboweni‚ as it is highly unlikely that a further increase for already-constrained corporate or personal income tax payers will yield further income.

Funding Ramaphosa’s stimulus package

The MTBPS will have to apply some innovative solutions to enable the implementation of President Cyril Ramaphosa’s stimulus package aimed at boosting employment and spurring economic growth. In light of the fact that stimulus package has been positioned by Ramaphosa as “budget neutral” and that R50bn has already been earmarked from existing funds‚ it remains to be seen which line items will be the most affected. Additionally it is yet to be revealed where the funds will be drawn from to support the R400bn infrastructure fund.

Clarity on land expropriation without compensation?

Ramaphosa was applauded in September for setting up a 10-person advisory panel on land reform which has been mandated to review‚ research and suggest models for government to implement a fair and equitable land reform process.

The issue yet to be tackled is the amendment to section 25 of the constitution following Ramaphosa’s previous announcements that government would seek a constitutional amendment to allow it to expropriate land without compensation.

Policy consistency is a critical aspect that is arguably yet to be achieved. An uncertain regulatory landscape cannot hope to instil confidence in foreign investors. Not only does this refer to how expropriation without compensation will look as a policy document‚ but also in how the wording of section 25 of the constitution will be amended to accommodate this. As the founding document from which policy takes its lead‚ there is the additional risk that the amended section 25 will create ambiguity for other pieces of existing legislation that govern investment in SA.

Now is the time for government to provide a clear and coherent sense of what policy will look like and how both foreign and local investors’ rights will be protected.