- Overarching fiscal intent unchanged: The 2023 budged reiterates government’s commitment to debt stabilisation and a primary surplus. The key features of the fiscal forecasts matched our expectations – specifically, government debt is now forecast to peak at around 73.6% of GDP, with the higher peak mainly owing to R254bn of relief for Eskom. The new FY22/23 budget deficit is forecast to be slightly smaller, mainly owing to more (persistent) underspending and additional diesel spending by Eskom pledged in the State of the Nation Address (SoNA) not being funded by the fiscus, as well as a small revenue overrun. Treasury’s new economic growth forecasts are slightly below ours, though its tax buoyancy estimates are higher. On balance, while the risks from the macroeconomic backdrop persist, the budget has reduced the fiscal uncertainty that still prevailed after the October 2022 Medium-Term Budget Policy Statement (MTBPS).
- Financial market reaction likely neutral. Investors will draw some comfort from the continuity of the general fiscal intent, and more clarity about the fiscal impact of support for Eskom. We still see scope for weekly bond issuance to remain unchanged in the next fiscal year (FY23/24), with the increase in total funding from the domestic bond market relative to the current year likely to be from floating-rate note (FRN) issuance (both the existing bond and a mooted new one) as well as the planned issuance of a Sukuk (Islamic) bond instead, though bond investors may initially remain cautious until Treasury makes a formal announcement. This will likely be the bond market’s focus for now, rather than the further jump in domestic bond market fund raising foreseen in FY24/25 which would require an increase in weekly issuance unless it is addressed beforehand by the “number of strategies” that Treasury said can be used to reduce the medium-term gross borrowing requirement that is boosted by elevated redemptions. Before the budget, our fair value models implied that the bond market was discounting a modest risk premium, and this should remain intact. There is no mention of any new bonds (except the mooted new FRN). The budget should also be neutral for the rand and equity market.
- Fiscal risks persist: Investors will naturally still be concerned about the downside risks to the economic growth trajectory amidst the surge in loadshedding and a less supportive global economic backdrop, as well as upside risk to spending on social grants, wages and SOE support. While we share these concerns about the potential risks, the forecasts seem to be a reasonable baseline. The large unallocated reserve (R36bn in FY23/24 and R45bn in FY24/25) is preserved, which we estimate should, along with the social grant budget, be more than adequate to fund a further extension of the covid relief of distress grant. Only modest compensation growth is incorporated in the spending estimates for FY23/24, though this was always planned to be the final year of the step-change in the wage bill (with real growth again thereafter). The tax relief for renewable energy slightly exceeded our expectations, which should further boost the sizeable private-sector generation capacity that we estimate is already operational and/or underway. The budget provides some additional support for key components of the reform agenda, though electricity is clearly, and unsurprisingly, the major focus.
Broadly as expected, but risks persist
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