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INVESTMENT REVIEW

   
         
   

Momentum in US dollar liquidity has picked up again as monetary tightening by central banks has been postponed, or perhaps reached its end, whilst trade negotiations between the US and China have also become more palatable, at least on the face of it.

The global economy is expected to expand at a lower, but still modest pace this year, although much depends on the trajectory of interest rates, given a world economy that has become heavily reliant on debt and asset valuations to keep it afloat. So far this year risk assets have enjoyed a strong rebound, but government bond yields have hardly moved and are signalling a much more cautious outlook.

While structural risks such as protectionism and high levels of government-and-corporate debt remain, we expect that near-term growth will be bolstered by a more supportive US Federal Reserve.

Closer to home, all eyes were on Finance Minister Tito Mboweni as he delivered his 2019 budget speech in February.


 

In addition to outlining a financial rescue package for Eskom that would amount to R69 billion over the next three financial years, the minister also announced that there will be a tightening of operations at the South African Revenue Services, with the appointment of a new Commissioner and units focusing on corporates and the illicit economy, which will hopefully lead to improved revenue collection.

Disappointingly, the expenditure ceiling will be breached over the next few years due to the financial assistance to Eskom, but Mboweni did announce R50.3bn in underspending over the medium term to at least partially offset the expected increase in overall expenditures.

The minister also emphasised the government’s determination to reduce expenditure by lowering the public wage bill by reprioritising resources towards the President’s Infrastructure Fund and away from the wage bill.

This is an indication of government’s commitment to improving economic growth and investing in much needed infrastructure development to increase South Africa’s global competitiveness.

 

Although the budget presented slightly raised governments debt matrices with Debt to GDP expected to stabilise at 60.2% (59.6%) in 2023/24, we believe the minister managed to present a balanced budget that tried to appease conflicting interests. Even though the budget would be viewed as credit negative and the risk of a downgrade remains, it may have done enough to avert a credit downgrade by Moody’s in its next scheduled review on 29 March 2019.

South Africa is not out of the woods yet and risks of a sovereign downgrade still loom large. The outcome of the general elections on 8 May 2019 will be a key determinant of whether South Africa embarks on the high road to recovery.

    
         
 
     
 

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