SLOW FIX

All eyes are on the fi­nance min­is­ter as rat­ings agen­cies threaten down­grades and as ris­ing in­ter­est rates put fur­ther pres­sure on cit­i­zens

CityPress - - Business and TENDERS - JUSTIN BROWN justin.brown@city­press.co.za

Wed­nes­day’s bud­get speech will be one of the most crit­i­cal since the ad­vent of democ­racy in 1994. Fi­nance Min­is­ter Pravin Gord­han will present his spend­ing plan, ex­pected to be R1.45 tril­lion, for 2016 just over two months af­ter Pres­i­dent Ja­cob Zuma fired Nh­lanhla Nene, which shocked the coun­try and in­vestors, and re­placed him with lit­tle-known ANC MP David “Des” van Rooyen.

The move knocked the rand to an all-time low and JSE stocks lost tens of bil­lions of rands in value. Days later, in an ef­fort to re­store con­fi­dence, Pres­i­dent Zuma reap­pointed Gord­han to the job.

As Gord­han steps up to the podium, for his first bud­get since 2014, and says “Madam Speaker” in Par­lia­ment, he will know that he needs to ad­dress a num­ber of tough chal­lenges.

Th­ese in­clude in­ter­na­tional rat­ings agen­cies breath­ing down his neck with the pos­si­bil­ity of a down­grade to junk sta­tus, an econ­omy on the brink of re­ces­sion, de­clin­ing tax rev­enues, high un­em­ploy­ment, ris­ing in­ter­est rates, fall­ing com­mod­ity prices, a dev­as­tat­ing drought and loom­ing mu­nic­i­pal polls.

To bal­ance the govern­ment books, Gord­han is ex­pected to limit or cut ex­pen­di­ture and hike tax rates.

Ned­bank econ­o­mists Nicky Weimar, Den­nis Dykes and Isaac Mat­shego said this week: “Gord­han has the un­en­vi­able task of pro­duc­ing a bud­get in ex­ceed­ingly tough eco­nomic times that will con­vinc­ingly il­lus­trate govern­ment’s de­ter­mi­na­tion to re­store fis­cal dis­ci­pline to avoid a fur­ther down­grade of South Africa’s sov­er­eign risk rat­ing to spec­u­la­tive sta­tus, and re­store pub­lic and in­vestor trust in Na­tional Trea­sury af­ter the con­fi­dence-sap­ping events of De­cem­ber last year.”

Peter Mon­talto, a Lon­don-based econ­o­mist for No­mura, said: “We ex­pect a mix­ture of tax in­creases and ex­pen­di­ture cuts to off­set higher spend­ing on education and debt ser­vice costs, as well as the marked im­pact of lower growth on rev­enues.”

The coun­try got its first in­vest­ment grade rat­ing from Moody’s In­vestors Ser­vice in May 1995. Now, al­most 21 years later, that sta­tus is at risk.

A credit rat­ing is used by sov­er­eign wealth funds, pen­sion funds and other in­vestors to gauge a coun­try’s credit wor­thi­ness, and is key to de­ter­min­ing in­ter­est rates.

A cut to junk would hike lo­cal in­ter­est rates, weaken the rand and re­sult in bil­lions of rands in for­eign money ex­it­ing the coun­try.

To try to avert a down­grade, lo­cal busi­ness, es­pe­cially the banks, which will be among the hard­est hit by such an event, have met with Pres­i­dent Zuma and Gord­han a num­ber of times in re­cent months to stress the im­por­tance of cred­it­wor­thi­ness and to pro­pose plans to avoid junk sta­tus.

“High up on our agenda is to pre­vent a sov­er­eign down­grade,” Pres­i­dent Zuma said in Par­lia­ment this week dur­ing a de­bate on his state of the na­tion ad­dress, ac­cord­ing to Bloomberg.

Mon­talto said he ex­pected Moody’s could slash the coun­try’s rat­ing to sub-in­vest­ment grade by the end of June and Stan­dard & Poor’s may cut South Africa to junk by the end of this year.

Last year, Nene hiked the in­come tax rate for the first time in 20 years, and Gord­han is likely to in­crease it again this week.

“Per­sonal tax rates are likely to in­crease, while the rates ap­ply­ing to in­di­rect taxes will prob­a­bly be raised even more ag­gres­sively than in past years,” said Ned­bank econ­o­mists.

Jo­hann Els, Old Mu­tual In­vest­ment Group econ­o­mist, said the op­tions avail­able to Gord­han in­cluded hik­ing VAT, which would bring in more than R20 bil­lion.

How­ever, Eu­gene du Plessis, head of tax at Grant Thorn­ton, said: “Gord­han is un­likely to med­dle with the VAT rate in this lo­cal govern­ment elec­tion year. Ac­cord­ing to the Davis Tax Com­mit­tee, re­search shows that the ef­fect of in­creased VAT is far greater on the poor.”

On the other hand, Els said that in­creas­ing a num­ber of other tax rates – in­clud­ing hik­ing the top marginal rate, cap­i­tal gains tax, div­i­dend tax, fuel levy tax, es­tate duty and ex­cise taxes – would raise R25.3 bil­lion.

On the is­sue of ex­pen­di­ture, Ned­bank said that Gord­han would have to re­flect con­sid­er­able con­straint in spend­ing to con­vince rat­ings agen­cies that the govern­ment was se­ri­ous about restor­ing fis­cal dis­ci­pline.

No­mura’s Mon­talto said that there was un­likely to be “ma­jor set-piece” ex­pen­di­ture cuts, with a large num­ber of smaller cuts and un­spec­i­fied cuts pushed down to line min­istries and provinces more likely.

“Fail­ure to show mea­sures which will ac­tu­ally boost eco­nomic growth and markedly cur­tail cur­rent govern­ment ex­pen­di­ture [par­tic­u­larly spend on civil ser­vant re­mu­ner­a­tion] will likely prove in­suf­fi­cient to avoid a down­grade ... over the next three years,” wrote In­vestec Bank econ­o­mist Annabel Bishop.

Old Mu­tual’s Els said that Gord­han would need to ac­com­mo­date ex­tra ex­pen­di­ture like the R6.8 bil­lion univer­sity fund­ing and an es­ti­mated R5 bil­lion of drought re­lief within their ex­ist­ing spend­ing ceil­ing.

The In­ter­na­tional Mon­e­tary Fund, the World Bank and the SA Re­serve Bank have all slashed their fore­casts for lo­cal growth this year to less than 1%.

In Oc­to­ber last year, Nene pro­jected growth of 1.7% for this year.

Gord­han is also ex­pected to re­duce the govern­ment’s growth fore­cast.

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