PETER ATTARD MONTALTO: Mboweni has a tough task on his hands

With the MTBPS scheduled for 28 October, Finance Minister Tito Mboweni has a tough task on his hands.

This column was first published in Business Day.

Does SA have two different presidents? I am sure the Cyril Ramaphosa giving the speech on Zoom last week was a different one from the Ramaphosa we saw in parliament the week before.

Despite a messy background process behind the economic reconstruction and reform programme the policies and documents remained identical from week to week. However, there was a noticeable shift in emphasis and tone.

In the first speech, infrastructure seemed to hang in the air with no purpose. In the second, it was front and centre, with more emphasis placed on support for private sector job creation.

The first speech was derailed by impossible commitments on energy security during 2022 (which will politically come back to bite), while the second sounded like a state of the nation address with more emphasis, however, on implementation.

While nothing but implementation matters now, rhetoric and vibe are important for attempting at least to stir them.

Still, there were open goals not taken on the implementation side, with scant detail given on Operation Vulindlela to win people over. For that, we must wait for Wednesday’s medium-term budget policy statement.

Is a good budget policy document even possible? What about the speech? We are not talking here how the initial optics play against market expectations that may be set a little too bearish, but the underlying reality of macro- and micro-fiscal policy will come from this document and not from anything said in the Ramaphosa speeches.

Finance minister Tito Mboweni will be hamstrung from the start by the fact that SAA’s defibrillation is cabinet and government (and ANC) policy and so must be funded, as is likely to be the case with Denel, the Land Bank and others. There is also the court battle on the public sector wage bill, which will begin on December 2, to consider. Add these to uncertainty on growth and revenue from here, and Mboweni has a tough task on his hands.

There are, however, far more subtle and hard issues to consider.

The key is where the credibility centre of gravity is between the fiscal funding cliff edge and the negative consequences of tightening fiscal policy going into a recovery with huge developmental needs.

The simple logistical reality of what can be cut at what speed is going to be an issue. The room to move may not be huge, but a more credible  path would potentially open up more funding room in markets than showing non-credible debt profiles.

This was a debate that began after the emergency budget that never took off, with neither the active nor passive scenarios being credible. The passive one was far too mild to be a debt shock, while the active one implied a mix of primary balance and growth that didn’t add up.

Our fear is that the Treasury will try to stick too close to the active scenario of last time on what “must” happen — when there is little real upside in doing so. A profile that does this, making assumptions on three years of nominal wage freezes for instance, can easily be dismissed. Indeed, this is likely to be the heart of the “optics vs reality” problem of this medium-term budget policy statement.

Similarly, there is more credibility in showing long-run growth at 1.5%, as they did in the emergency budget (a credibility free lunch), than there is in trying to convince people that the economic reconstruction and reform programme will lead to 3% annual growth over a decade.

Our imaginary friend, the R500bn stimulus package, should also not make an appearance. Some other non-fiscal baubles and details on Vulindlela could all assist in offsetting a negative and realistic growth forecast with hope.

There is then a choice to play games on cutting bond issuance at the margin to generate a short-term and unsustainable rally in bonds in the longer term when in the next fiscal year you have a huge projected cash usage and a large wage bill and SOE costs on the downside.

A thorough examination of the subtle balance of choices in the medium-term budget policy statement will therefore be crucial.

The second issue is that complex nexus of factors swirling about the stalled $2bn World Bank loan as the Eskom elephant in the room and its red-light-flashing Medupi loan, SAA and general fiscal issues all come home to roost.

There is bound to be a rude awakening for the government in dealing with international institutions asking awkward questions. This is an unfortunate precursor to the drama we will have when SA is likely to have to go to the IMF for a full conditionality-laden programme. Markets are mulling this precedent already.

The final subtle and hard issue is that this medium-term budget policy statement is occurring against a backdrop of weaker Treasury internal capacity than at the emergency budget or in February. This narrative will grow in the coming weeks after our recent focus on the issue in this paper and its sister publication, the Financial Mail.

This has played out in the inability to undertake detailed expenditure reviews and zero-based budgeting, but also in dropped balls on state-owned enterprises. Maybe people will only wake up when a dropped ball turns into an explosion.

The path towards an IMF programme seems set, with reforms and consolidation unlikely to happen at the appropriate pace and so many landmines along the way.

Wednesday will add a slowing or acceleration of the pace on the path, but it is hard really to see what it could deliver that would fundamentally divert us off this path.

Only the accumulation of surprises on implementation and a shift in the mindset outside the Treasury — ultimately a shift in the political economy — might achieve that.

Attard Montalto is head of Capital Markets Research at Intellidex.