SA economy analysis by Cephas Forichi

SA economy analysis by Cephas Forichi

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February was indeed a busy month on the South African economic calendar, with the State of the Nation Address (SONA) and the budget speech claiming slots in the month. Before SONA was presented we saw African National Congress (ANC) President Cyril Ramaphosa being elevated to the country’s highest office – the President of the Republic. 

The appointment of President Ramaphosa was met with market euphoria and is expected to boost investor confidence. Already we have seen a rand rally on Ramaphosa becoming the ANC President and more recently the President of the Republic, supporting the view that the market has confidence in him. The strengthening of the rand is expected to filter through to various sectors of the economy and to reduce the import bill, specifically on fuel imports.

I envisage an increase in foreign direct investment (FDI) hinged on improved investor confidence. FDI inflows are starting to pick up from their low levels witnessed during the rout in commodity prices. The improvement in commodity prices will also add a little spark on FDI inflows. The expected increase in FDI will boost business activities, giving the economy a respite from job losses.

President Ramaphosa has been tough on corruption and I foresee his administration stamping out corruption in government and the private sector. Already a new board was appointed at Eskom. This augurs well with improving investor confidence. Despite all the positives and major gains on the political front, slow growth in capital formation, policy uncertainty and the precarious financial state of state-owned companies will continue to weigh on economic growth.

During the recent budget speech, the then Minister of Finance Malusi Gigaba presented a revised economic growth of 1% in 2017, which is expected to increase to 1.5% in 2018 and 2.1% in 2020. These depressed economic growth figures are bad news for the high unemployment rate that the country is experiencing. This means that unemployment will remain a problem in the medium term. The planned manufacturing and tech hubs in black communities and economic zones will be good for employment creation, if not remain at the policy level and lack implementation.

Government debt as a percentage of GDP is expected to break 50% in the 2018/19 fiscal year for the first time and will continue to be on the uptick in the medium term. This could crowd out private investment and could be a drag on the country’s credit rating. That said, I do not expect a credit rating downgrade on the South African economy in the near future.

With the rolling out of fee-free tertiary education – R57bn was allocated for fee-free higher education and training – the money had to come from somewhere. The government continues to consolidate its fiscal expenditure. R85bn is expected to be recovered through fiscal consolidation. This will contribute to narrowing the fiscal deficit to 3.5% of GDP in the 2018/19 fiscal year, from 4.3% of GDP in the 2017/18 fiscal year, and it will remain at that level in the medium term. This is positive for the country’s credit rating.

The government also proposed to increase taxes. With personal income tax and company tax – among the highest in the world, and which have been on the receiving end of tax hikes in recent years – spared this time, the Minister of Finance proposed an increase in sin taxes, ad valorem duty on luxury goods, the fuel levy, estate duty for the rich and, notably, value added tax (VAT). VAT has increased for the first time since 1993 from 14% to 15%.

The increase in VAT is being touted as not affecting the poor, given that social grants are proposed to increase at a rate that is above inflation. This would be true if the grants were only surviving on zero-rated and VAT-exempted goods.

Let us do some simple calculations.

The old-age grant is expected to increase from R1 600 per month to R1 690 per month. If a person used one-quarter of the grant (R400) to buy VAT-charged goods, he was paying R56 on VAT. Now, he will be expected to pay R63.38 VAT from the one-quarter of R1 690 (R422.50). The expected increase in VAT payment for this poor person will be 13.18%, which is more than the almost 5.6% increase in the grant amount. In other words, consumers are going to be hurt by the proposed tax hikes.

The budget is going to be tough for everyone. Nonetheless, the fee-free higher education and training initiative will be a benefit on the unemployment front, but in the long term.

28 Feb 2018