Tuesday, 04 March 2014 - 20:00

 

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Seed Weekly - SA budget and implications for investors

Last week, Pravin Gordhan presented his 5th budget speech as Minister of Finance. The aim of the budget is to present the forecasted government revenue and expenses. The sheer scale of the government finances as a percentage of the size of the economy means that it is an extremely important consideration for all investors in the local economy.

Most governments, including South Africa, run their finances at a deficit instead of a surplus. Again the deficit in absolute terms as measured against the size of the economy is an important number because it means that the government has to find this shortfall from funds outside of the revenue that it derives from the tax base. This shortfall is made up by government borrowing from local and international lenders.

The table below presents the key components of the last years and this year’s budgets against the 2014 actual. Firstly the size of the SA economy as measured by GDP, is around R3,5 trillion. In real terms it grew by just 1,9% in 2013. This is down from growth of 2,5% in 2012 and 3,6% in 2011.

The government is however pencilling in real economic growth of 2,7% for 2014, 3,2% in 2015 and 3,5% in 2016. Because an important measurement of government finances is the deficit as a percentage of the total GDP, a higher economic growth estimate helps to lower the budget deficit in percentage terms.

For the 2013/2014 financial year the budget deficit will come in at approximately R140 billion or 4% of GDP. The forecast for the 2014/2015 year is for the deficit to increase to R153 billion, but because GDP is expected to grow slightly, to remain at the 4% level. However cumulatively borrowings increase as the government needs to borrow these additional funds in order to make good this annual shortfall. The borrowing requirement also has to take into account maturity of older debt.

For the year ahead, while the budget is to spend R153 billion more than is received, because of redemptions, government has planned net financing requirement of R180 billion for the year ahead. This is new debt added onto existing debt and this is how the total gross public debt is now expected to rise to around 45% of GDP – see chart below.

Fortunately SA has a low percentage of foreign denominated debt. However gross debt in absolute terms has increased from around R600 billion in 2009 to the current level around R2 trillion. Increased debt means increased interest costs and while the current cost of debt financing to total expenditure is 9,2%, in absolute terms it is expected to increase by 11,2% and 15,2% over the following 2 years.

South Africa has done well in the past to reign in the relative size of its debt in the past, but on the projections over the next few years, there is concern as the debt levels approach 50% of GDP.

Government finances and their debt issuance have a direct bearing on the local bond market and the direction of longer term interests rates. At the same time a growing government increasingly crowds out the private sector as the higher demand for tax revenue is a cost for both individuals and companies.

Kind regards

Ian de Lange

www.seedinvestments.co.za
info@seedinvestments.co.za
021 914 4966

Tue, 04 Mar 2014

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