Nene takes over a tough balancing act

ANALYSIS

Nhlanhla Nene’s maiden budget speech on October 22 will test the country’s new finance minister.

Economists expect that he could be as tight-reined over spending as his predecessor, Pravin Gordhan, perhaps even more so in the face of declining revenues and depressed economic growth.

The country is experiencing a crisis of confidence in the broader government’s financial management, according to analysts, and will look to the treasury for reassurance that it is retaining a firm hand on the nation’s purse strings.

The medium-term budget policy statement, which outlines adjustments to the budget announced in February, follows the International Monetary Fund (IMF) cutting South Africa’s growth forecast to 1.4%, down from 1.7% in July, in its World Economic Outlook released on Tuesday.

The country’s credit rating is hanging in the balance, thanks to rising government debt and the deterioration of important measures of fiscal sustainability, such as the budget and current account deficits. And state-owned entities are appealing for further bailouts. The long-awaited details of a rescue package for Eskom are expected and, according to reports, both SAA and SA Express are looking to the treasury for more money to remain going concerns.

‘Glamour’ items
But indications from the government suggest that the way in which the parastatals will receive more funding will be far stricter than in the past and their viability might be reviewed.

In line with what Gordhan started, Nene is expected to extend cuts on “glamour” items.

A financial expert said that Nene’s style and tone would be as important as the substance of his statement.

He follows two finance ministers who held substantial political clout in the ANC and had a capacity for visionary strategies. The markets will be watching not just for credible fiscal promises but also for a man who is able to command arguably the most important government department with independence, fortitude and commitment.

This is crucial as Nene faces key tasks.

Trade unions
The public wage bill has raised its head again as the multiyear public service wage agreement ends in March next year.

He will face off with the public sector trade unions, which are seeking a 15% wage increase and the abolition of the bottom three salary levels of the government’s pay scale.

He must also contend with financing the government’s nuclear power procurement plans, now that it appears that talks with Russia are advancing fast.

Ralph Mathekga, of the consultancy Clear Content, said the government could borrow to finance its growing deficit. But this would have to be done in the light of repeated failures by parastatals and the wider mismanagement of funds by the government, not least of which was the spending on the president’s Nkandla homestead.

He said the public service was experiencing a serious “crisis of credibility” and the treasury needed to reassure the country it had systems in place to make sure the money would go where it was intended. Ensuring value for money was far more of a challenge than financing the government, he said.

Wage negotiations
The wage negotiations boded ill for the government, Mathekga said. The ANC continued to lose moral ground, hampering its ability to convince its union allies to restrain wage demands in the broader interests of the economy.

According to Investec’s Annabel Bishop, a deterioration in the fiscal deficit projection could be expected, because economic growth was likely to be closer to 1.5% year on year compared with the treasury’s forecast of 2.7%. Furthermore, halfway through the current fiscal year, expenditure was slightly higher than budgeted for when compared to the previous year and revenue collections were lower.

She said Nene would “need to soothe anxiety stemming from the rating agencies around a perceived deterioration in fiscal health”, and he would probably do it by maintaining the government’s ceiling on expenditure.

She said she believed Nene would follow in Gordhan’s footsteps “and be as tight-reined, if not more so through necessity”. Underspending on infrastructure could provide additional savings but would be negative for economic growth.

Referring to the parastatals, she said that government guarantees totalled R466.2-billion, which was deemed “the upper limit of what would be prudent”.

She said Nene’s statement could contain additional guarantees to Eskom, but the rating agencies would scrutinise it to establish the source of the funding. If the guarantees rose much more, they would have a negative impact on South Africa’s sovereign credit rating.

Oil price plummets to three-year low

Warnings about dwindling oil supply paired with an ever-bolder self-proclaimed Islamic State should mean a higher oil price. Instead, the price this week hit a three-year low of $91 a ­barrel owing to supply and demand dynamics that are proving stronger than geopolitical ­tensions.

Oil prices have been ramping up since the 1980s, when demand outstripped supply, and skyrocketed to $147 a barrel in 2008 before the recession took hold. As the global economy picked itself up the price has bounced between $100 and $120 since 2011.

Now the price has fallen by more than 20% since June. Demand is subdued as alternative oil comes on line and Saudi Arabia responded, oddly, by cutting the price further.

“Looking at offshore and onshore oil produced through ­normal extraction technologies, regular conventional oil production has been largely flat since 2005,” said Jeremy Wakeford, chairperson of the Association for the Study of Peak Oil South Africa.

What has changed the picture dramatically is shale oil, which, like shale gas, is extracted through hydraulic fracturing (or fracking) and both have driven an energy boom in the United States.

Top producer
The US, previously the second largest importer of crude, this year surpassed Saudi Arabia as the largest crude oil producer in the world.

“US shale oil production – it’s up to about 2.3-million barrels per day at the moment and that has been gradually ramping up,” Wakeford said. “In North Dakota oil production is ramping up month on month.”

A 2013 PwC study on the impact of shale oil on global oil prices found a potential 14-million barrels could come on line by 2035 and could see the price drop by about 25% to 40%. Production in the US, however, experienced a fairly steady increase, Wakeford said, and did not explain the sudden plunge in the oil price.

The world economy is not growing as fast as predicted and demand for oil has been weaker in the past few months, particularly in China and in Europe, where concerns about the region’s economy have been stoked by fresh monetary stimulus measures.

“Partly because of Europe’s troubles, the US dollar has also been strengthening and when the dollar strengthens the oil price declines. There is an inverse relationship,” Wakeford said.

“[The] shale [gas and oil boom] wouldn’t have happened if oil prices didn’t get to the point they reached.

“Hydraulic fracturing technology has been available for a long time but was costly. Only lately have oil prices been high enough to justify it,” said Wakeford.

Whether or not a supply cut is on the cards is expected to become clear at the final scheduled meeting of the year of the Organisation of the Petroleum Exporting Countries (Opec), which takes place in November.

Interesting reaction
Anton Botes, Deloitte & Touche’s oil and gas industry leader, said so far Saudi Arabia has reacted to the price drop in an interesting manner.

“Instead of decreasing production in an attempt to curb supply and bolster prices, they did exactly the opposite,” said Botes.

“The Saudis, who were losing market share because of US production, have decided to keep producing, allowing the price to creep downward, thus forcing high-cost producers out of the market and hoping they will re-establish market share.”

Saudi Arabia announced it would cut the price of oil – by about $1 a barrel – signalling that they perhaps aren’t considering a cut in production.

“That in itself is strange,” Wakeford said. “Any time the price has dropped, Opec has dropped production … I would certainly expect that Opec would cut production.

“But they are also quite sensitive about the demand situation and don’t want to kill the golden goose by putting countries into near recession territory.”


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