SA Investment Strategy | Budget FY19/20E preview – Implications for SA equities

FM Mboweni is scheduled to present SA's budget on February 20, 2019.In this research, we present expectations from the budget and scenario implications on SA equity markets. We see downside risks to SA's GDP forecast of 1.7% in 2019, as forecasted in the MTBPS in October 2018.We believe that the government will allow for fiscal slippage to c.4.4% of GDP in 2019/2020. We expect the Treasury to detail the sources of an additional c.R27bn in revenue interventions in FY19/20E than had been previously indicated. In our view, this could only include a range of “soft” measures, including fuel levy, capital gains tax, dividend tax, estate duty, excise duty, sugar tax and fiscal drag. With probable near-term fiscal slippage, we see a high likelihood of a Moody's negative rating outlook on SA by 4Q19. That said, SA's de-facto credit rating remains a notch below that assigned by the rating agencies. A rating downgrade by Moody's will probably not trigger a big bond market sell-off. We remain Underweight the SA domestic demand stocks (including Woolworths, Truworths, Barloworld) with employment, real wages and credit growth the missing links.