Understanding South Africa’s budget and its impact on Namibia
By Floris Bergh
Chief Investment Officer: Equity & Asset Allocation
The South African Budget will probably appease the rating agencies. The Minister of Finance (MoF), Pravin Gordhan did his best to balance conflicting forces (in more ways than one) and came up with a politically palatable and yet, fiscally sound Budget.
This means that SA’s foreign currency sovereign rating is safe for now. Political risk events such as a cabinet reshuffle that results in Gordhan losing his job, may still derail the rating, because it will create the perception that the SA government is not serious about fiscal consolidation.
By fiscal consolidation we mean that expenditure is controlled and reduced wherever possible, that revenue does not fall away and that the result is lower budget deficits and a stabilization of the debt-to-GDP ratio.
Financial markets’ reactions were fairly muted, even positive. The rand strengthened since the budget was delivered and is currently at ZARUSD 12.90. Bond yields have also strengthened and are down about 10bp with the R186 at 8.67%. The equity market is virtually at the same levels. The property market initially did not like the increased withholding tax on dividends, but recovered when investors realized the effect will be small. For instance, a yield of 10% pre-5% increase will now be 9.5% post-5% increase. It is not negligible, but it is not a game changer.
The revenue measures announced in the 2017/18 Budget will raise an additional R28 billion for the fiscus: New top marginal income tax bracket – raise additional R16.5 billion, Higher dividend withholding tax of 20% – raise additional R6.8 billion, Fuel levy and sin taxes – raise additional R5.1bn and Sugar tax and carbon tax coming soon.
This means that the MoF expects to raise R1.41tn in revenue. This amounts to 30% of GDP. The biggest sources of revenue are taxes on income and profits (i.e. individuals and companies) which contributes 59% of revenue and VAT which contributes 36%. There is no doubt the South Africans is a highly taxed nation.
It was disappointing that there is a seemingly lacklustre approach to rein in spending. The MoF expects to spend R1.56 trillion which is 8.2% higher than the previous year and amounts to 33% of GDP. More than a third, in fact 35%, of spending is absorbed by the wage bill, which amounts to a staggering R550bn – about three times the size of Namibia’s total GDP.
Another third of spending goes to subsidies and transfers, which includes social grants to 17 million South Africans. For many this is their only source of income and means of support for families. This means that the Budget is already a major means of redistribution of income.
The deficit is expected to be 3.1% of GDP this coming fiscal year and will then reduce to 2.6% over the next two years if things go according to plan. This means that total debt will stabilize at about 48% of GDP. For credit rating purposes 50% is the magical number – therefore the deficit and debt metrics are in favour of a “stay of execution”.
However, the 48% is for net debt. Gross debt will still run at 52% plus. Furthermore, the fiscus is exposed to guarantees and contingencies amounting to roughly R1tn. This is not debt, only potential debt if the entity on behalf of which these guarantees were given defaults on its debts. These entities are mostly SOE’s – the Eskoms and Sanrals of the world. The status and (mis)management of SOE’s could still prove to be the Achilles heel of the SA fiscus.
A glimmer of light for Namibia is tucked away in the SA Budget documents therein that the estimates for outgoing payments from the SACU pool is up sharply. This could prove to be a game changer for the Namibian fiscus and the economy at large. It will relieve pressures in more ways than one.