ECON­OMY WATCH

Will Nene have any pos­i­tive news?

Financial Mail - Investors Monthly - - Contents - With Asha Speck­man

SA’s sur­prise re­ces­sion has raised the stakes for fi­nance min­is­ter Nh­lanhla Nene, who is un­der pres­sure to de­liver a credit rat­ings pos­i­tive medi­umterm bud­get pol­icy state­ment in Oc­to­ber.

Nene will present the bud­get to par­lia­ment on Oc­to­ber 24. In­ter­na­tional credit rat­ings agency Moody’s is ex­pected to de­liver its credit rat­ing ac­tion on Oc­to­ber 12, which could cul­mi­nate in a down­grade of SA’s re­main­ing in­vest­ment grade rat­ing to junk if met­rics weaken sig­nif­i­cantly.

In Septem­ber Moody’s warned that weaker-thanex­pected eco­nomic per­for­mance “would ex­ac­er­bate mone­tary and fis­cal chal­lenges for SA” and was “credit neg­a­tive”. The econ­omy con­tracted by 0.7% in the sec­ond quar­ter of 2018. S&P Global Rat­ings and Fitch low­ered SA to subin­vest­ment grade last year.

The econ­omy is ex­pected to grow by less than 1% for the year, which may limit the abil­ity to achieve tax col­lec­tion fore­casts.

Cor­po­rate and per­sonal in­come tax col­lec­tion was weak in the first half of this year, data for April to July shows.

PwC tax tech­ni­cal & pol­icy direc­tor Kyle Mandy says: “In ag­gre­gate, rev­enue col­lec­tions as at July were largely on track, thanks to the strong VAT per­for­mance off­set­ting the un­der­per­for­mance of in­come taxes.”

How­ever, con­sumer ex­pen­di­ture is ex­pected to re­main un­der pres­sure. This will weigh on VAT, the gen­eral fuel levy and weaker de­mand will dampen im­port du­ties. PwC ex­pects the tax short­fall for 2018 to be R5bn-R10bn.

Ex­pec­ta­tions for lower rev­enues have raised ques­tions about how the gov­ern­ment can fund the R43bn eco­nomic stim­u­lus pack­age Pres­i­dent Cyril Ramaphosa an­nounced af­ter the cab­i­net lek­gotla in Au­gust. Nene is ex­pected to pro­vide fur­ther de­tails in his bud­get speech.

Economists say at­tempts to hike per­sonal and cor­po­rate in­come taxes fur­ther would be “self-de­feat­ing” and dam­ag­ing to the econ­omy in the long run. In­creases in prop­erty taxes, in­clud­ing es­tate duty and do­na­tions tax, are an op­tion but the re­sult may be pal­try. Mandy says: “We have run out of space for fur­ther tax in­creases.”

An­other chal­lenge is the fuel price, which may have to be hiked by more than R1/litre in Oc­to­ber

An­other chal­lenge to the fis­cus in the new month is the fuel price, which may have to be hiked by more than R1 a litre in Oc­to­ber. En­ergy min­is­ter Jeff Radebe is un­likely to re­lieve con­sumers again by dip­ping into the slate levy fund to re­cover fuel costs.

Econometrix chief econ­o­mist Azar Jam­mine says: “[The gov­ern­ment] won’t have money to fi­nance that any­more. Ei­ther it is go­ing to have to in­crease the fuel price dra­mat­i­cally [in Oc­to­ber] or it is go­ing to have to find other sources of rev­enue.”

Deloitte Africa as­so­ciate direc­tor Han­nah Edinger, and Deloitte Africa tax & le­gal direc­tor Billy Jou­bert say im­prov­ing growth is crit­i­cal for cap­i­tal flows “with in­ter­na­tional in­vestors un­likely to view an econ­omy in con­trac­tion ter­ri­tory as an at­trac­tive op­tion”.

JSE data shows net bond out­flows were R18.3bn for Au­gust and for the year to date (early Septem­ber) bond out­flows are R45.8bn, com­pared to the same pe­riod last year when in­flows reached R54bn. SA bond in­flows had been ris­ing steadily since 2014. Net sales of eq­ui­ties were R14bn in Au­gust this year com­pared to net sales of R65.2bn for Au­gust last year.

In the first week of Septem­ber 2018 net bond out­flows were R1.7bn and eq­ui­ties re­alised R6.2bn in out­flows.

Do­mes­tic busi­ness sen­ti­ment has also slipped. The SA Cham­ber of Com­merce & In­dus­try busi­ness con­fi­dence in­dex for Au­gust dropped 4.2 in­dex points to 90.5 in Au­gust — the low­est in al­most a year.

In Septem­ber, Nene said the “out­look for the econ­omy re­mains frag­ile”. SA is heav­ily re­liant on for­eign sav­ings to fi­nance its cur­rent ac­count deficit while do­mes­tic sav­ings are in­suf­fi­cient to meet the coun­try’s in­vest­ment needs.

He said: “A sud­den stop, or re­ver­sal in cap­i­tal in­flows, is gen­er­ally as­so­ci­ated with a sharp de­pre­ci­a­tion of the cur­rency, a sharp rise in bor­row­ing costs, and a fall in ag­gre­gate de­mand. Out­put will fall and unem­ploy­ment will rise sub­stan­tially, gen­er­at­ing fur­ther risks for the fis­cus.”

The gov­ern­ment, busi­ness and labour un­der the aus­pices of the Na­tional Eco­nomic De­vel­op­ment & Labour Coun­cil will con­vene a Jobs Sum­mit from Oc­to­ber 4-5. The sum­mit will fo­cus on col­lab­o­ra­tive and high-im­pact in­ter­ven­tions to drive job cre­ation, job re­ten­tion and eco­nomic growth. Five work­ing com­mit­tees have been meet­ing weekly up un­til the jobs sum­mit.

Ramaphosa in­tends to raise $100bn in in­vest­ment over the next five years. The gov­ern­ment’s in­vest­ment sum­mit is sched­uled to fol­low the bud­get in late Oc­to­ber.

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