Will Nene have any positive news?
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.