South Africa gets ready for the plunge

South Africa’s finance minister will make a second attempt at presenting an acceptable budget to a fractious coalition government, raising questions about future investment in the country if it doesn’t pass.

“Investors are at this stage very focused on the durability and efficacy of the government of national unity,” said Elna Moolman, head of South Africa macroeconomic research at Standard Bank Group.

“They’d view any further disruptions to the budget process as an indication that the GNU isn’t working very well, which would reduce their expectations in terms of growth and fiscal reforms”

Enoch Godongwana and his National Treasury officials were sent back to the drawing board last month after his revenue and spending plan failed to get buy-in from parties including the Democratic Alliance, the second-biggest group in the GNU.

That led to the budget being postponed for the first time in at least three decades.

South Africa’s bond yield curve has steepened since the delay, as long-term yields rose on concern about the outlook for government borrowing.

The sticking point was a proposed two percentage-point increase in the value-added-tax rate — a levy on goods and services — to 17%. Negotiations since then have been focused on getting the coalition to agree to a compromise formulation.

The coalition took power last year after the African National Congress lost its outright majority for the first time since apartheid ended in 1994.

Its formation has made the budgeting process more complicated, because there is a need for cross-party consultation instead of the ANC taking decisions on its own.

The VAT increase proposed by the Treasury in the abandoned budget would have raised 60 billion rand ($3.3 billion) in the fiscal year that begins on April 1.

In the latest plan, an “obvious” compromise would be to lift VAT by 0.5 to 1 percentage point, along with a more moderate increase in spending than previously proposed, said Andrew Matheny, economist at Goldman Sachs Group Inc.

“I don’t think they’re going to do the full 60 billion rand of spending proposed,” he said. “That’ll be part of the compromise.”

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Most economists surveyed by Bloomberg also foresee a VAT increase in that range.

Two people familiar with the budget talks said a 0.5 percentage point hike would be backed by cabinet members if the Treasury shows a commitment to fast-tracking economic growth, and proposes significant spending adjustments.

The DA would only support a budget that commits to pro-growth reforms such as the concessioning of the Cape Town port, firm deadlines to remove structural bottlenecks and spending reviews, party leader John Steenhuisen said at the weekend.

He sees it as unlikely that the budget would be postponed again, but if his party’s demands aren’t met, it won’t vote for it to pass. That might result in a “scramble” in parliament in which the coalition would have to get support from parties outside of the alliance.

Parliament is likely to vote on the budget in May, though portions of it will be debated before then.

Mpho Molopyane, chief economist at Alexforbes expects the budget to be supportive of the coalition government’s commitment to building a capable state and promoting economic growth.

“But they will have to walk back some of the expenditure commitments or expenditure plans which they had allowed in this now-postponed budget,” she said. “How much they then walk back on the revenue side will depend on how much they’re able to reprioritize on the expenditure side.”

Even so, coalition members are at odds on spending. While the DA has proposed deeper cuts, Godongwana has cautioned they would hurt critical government services, a key consideration ahead of local-government elections next year.

“The silver lining here is that it looks like there’s actually quite a bit of consensus on the need for fiscal consolidation across the main parties within the GNU,” Matheny said. “There’s disagreement on how to get there.”

Other considerations available to the Treasury include increasing the fuel levy and taxes on alcohol and tobacco products, pausing pension fund contributions for state workers, and raising borrowing — which would be counterproductive if it is to meet its debt-stabilization targets.

In the draft budget, the Treasury projected that debt would peak in 2025-26 at a slightly higher level of 76.1% of gross domestic product, while economists surveyed by Bloomberg see it doing so at 76.5% of GDP.