25 October 2016

The #MTBPS 2016 in a Nutshell

My Money Matters |

You’ve probably been hearing about the Medium Term Budget Policy Statement, otherwise known as the #MTBPS2016, over the past few weeks – especially since the country’s economy hasn’t been in the most stable state. You’ve also probably been wondering what it is all about and why the average South African should care about the budget adjustments that Finance Minister, Pravin Gordhan will announce on 26 October.

The first point to understand about the MTBPS, is that it is different from the Budget Speech. Craig Pheiffer, Chief Investment Strategist at Absa Stockbrokers and Portfolio Management, sums it up as an opportunity for the National Treasury to update and adjust the national budget – which is annually announced in February. To do this, the most recent local factors such as drought, protests, and salary increases are taken into consideration in order to give the most realistic projection of the country’s financial state.

Information in the MTBPS is then used by ratings agencies to determine the credit-worthiness of a country and this time around we face a potential downgrade in our rating.

While the MTBPS won’t have an immediate effect on the everyday lives of ordinary South Africans, it does give a rough indication of what’s to come in the next three-year cycle.

“The only time when we’ll see immediate changes to fuel levies, taxes, and food prices, is after the Budget Speech that takes place in February.  But the Medium Term Budget Policy Statement is more about the bigger picture that eventually impacts the smaller things. It tells us how much debt the country has, if sufficient revenue is being collected annually, and where the country is in terms of economic growth,” Pheiffer explains.

Pheiffer further stresses the importance of maintaining a small budget deficit – the percentage of the country’s expenditures that exceed revenue. A big budget deficit would almost certainly guarantee a downgrade by ratings agencies.  “The ideal is for the National Treasury to find ways to shrink this deficit in three-year cycles.”

Apart from the budget deficit, the other critical factor to consider, is how we can use the budget effectively to grow the country’s economy.

“We want to grow the economy and we want to increase the Gross Domestic Product (GDP), but unfortunately the challenge is that you need money to do that. The revenue is probably going to be lower than expected in the current cycle, but that’s why it’s so important that we can show the ratings agencies that we have initiatives and plans in place to effectively grow the economy.”

Although it’s difficult to predict what the National Treasury will prioritise in this year’s MTBPS, it’s certain that the increasing unrest around the issue of free education will see this portfolio receive a significant amount of attention this time around.

“This is a very challenging situation and I’m not sure what the solution would be. Right now we’re actually looking to cut back on spending since we’re not in a position to increase the budget even higher than it already is. The only other solution is to shuffle and reallocate the existing revenue.”

The same uncertainty hangs around the controversial nuclear plans rumoured to cost around R1 trillion, as well as the condition of state-owned enterprises (SOEs) such as South African Airlines (SAA), Eskom, and the South African National Roads Agency Limited (Sanral).

According to Pheiffer, it’s difficult to predict how this year’s MTBPS will measure up to that of previous years. But one thing is certain – changes will have to be made.

“The challenge that we had last year is very similar to the challenge that we have this year. The economy is growing at a snail’s pace, so the revenue that the National Treasury would have collected will be considerably lower than what they predicted to make the budget balance at the start of the year. I think given the challenges, the government has no choice but to cut somewhere. They are under pressure and they will have to either find additional revenue, tighten up on state expenditure or more than likely, both.”

Here are a few other topics you can expect to hear about when Minister Gordhan delivers his MTBPS:

  • Revenue trends and tax reform
  • Fiscal policy and the budget framework
  • Division of revenue
  • Medium term expenditure framework
  • State-owned enterprises
  • Implementation of cost-containment measures
  • Financial sector reform and promoting investment

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.

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