South Africa has missed out on a robust period of global economic expansion, with developing countries growing significantly faster than SA, which has even slipped into a technical recession, says Reza Hendrickse, portfolio manager at PPS Investments.
The growth forecast for the country for 2018 has nearly halved from 1.5% to 0.7% and is expected to reach 2.3% in 2021.
“This pales in comparison to developing countries, that are currently growing at a rate of almost 5% per annum. For this reason, president Cyril Ramaphosa’s recently announced stimulus measures are a welcome step to help kick-start growth and address the high level of unemployment.
“The plan is not as bold as stimulus measures seen abroad, but it is a step in the right direction,” Hendrickse said.
Finance minister, Tito Mboweni, expanded on the president’s five-pronged stimulus plan in a fair amount of detail during the 2018 Medium Term Budget Policy Statement (MTBPS), calling it “achievable”, under the preconditions of a stable fiscal position and stable inflation.
“Mboweni starts off on the back foot with some initial slippage since the National Budget Speech in February, including a revision in lower tax revenues and gross debt now projected to stabilise at a higher level of 59.6% of GDP in 2023/24.
“The significantly above-inflation public sector wage agreement has not made matters any easier, along with the further requests for state-owned entity support. Revenue collections so far this year are ahead of last year, but full year tax collections have been revised lower by R27.4 billion, mostly due to higher VAT refunds,” Hendrickse said.
The revenue shortfalls for 2019/20 and 2020/21 have also been revised higher by R24.7 billion and R33 billion respectively, the analyst said.
Maarten Ackerman, chief economist and advisory partner at Citadel Investment Services said that with economic growth expectations for 2018 having halved, it will have a ripple effect in terms of tax collection which will, in turn, place additional pressure on fiscal targets and debt to GDP ratio.
“But despite this deterioration, it is probably a more positive budget in terms of its messaging compared to last year’s MTBPS.
“At that stage, we had started to make provision for projects such as the nuclear deal, resulting in a debt to GDP ratio that would be rising to 60%, a key level that signals a dip in economic soundness to the rating agencies. If breached, especially at a time of challenges coming from state owned enterprises, it could signal a credit downgrade,” said Ackerman.
“Subsequent to that speech, we were indeed downgraded and although debt to GDP is still expected to approach 60% and stabilise there over the budget framework period, the message of fiscal discipline and building towards future growth is more reassuring.”
February tax hikes unlikely
Tax revenue is projected to fall short by R27.4 billion on the back of our economic headwinds. Despite this, a distinct positive emerging from the MTBPS is that an increase in personal or company tax in the February budget seems unlikely which should provide some relief for a battered consumer base, Ackerman said.
Focus on government spending: lower wage bill, higher investments
The minister also emphasised that government needs to focus on addressing the mismanagement of funds, reducing irregular expenditure and ensuring that government spending is more efficient.
“Mboweni also correctly flagged South Africa’s growing fiscal deficit as an issue requiring urgent attention, and in particular pointed to the problem of the growing public sector wage bill, with wage increases that have been running well above inflation for a number of years. This year’s wage agreement exceeding the budget baseline by R30 billion, for example, meaning a massive funding challenge.
The South African public sector wage bill is currently the highest among the OECD countries, and remains one of the country’s greatest fiscal challenges moving forward.
“And although government will be very reluctant to reduce the size of the public sector in the run-up to an election year, it is positive to see that they are well aware of the issue and will turn their attention to reducing this expenditure over time,” said Ackerman.
On another positive note, Mboweni further highlighted the need for government investment over consumption, as a lack of investment in the economy over the past few years has contributed to unemployment stagnation in mining and manufacturing output and job creation, he said.
Private-Public Partnerships are part of the solution
“In terms of State-Owned Enterprises (SOEs), we saw a huge shift in messaging from previous speeches which had emphasised government’s ongoing commitment to no private partnerships.
“In a complete turn, Mboweni instead acknowledged that the walls that exist between the public and private sector must be lowered and private partnerships considered in order to turn poorly performing SOEs around,” said Ackerman.
This shift, he said, seems to reflect government’s realisation that, while changing the boards and reducing corruption and mismanagement are steps in the right direction, these organisations are in serious financial need. “Given the financial constraints that SOEs are under, private-public partnerships are definitely part of the solution, and this acknowledgment represents a huge step forward.”
Mboweni was very clear, Ackerman continued, that government would like to rebuild confidence and unlock private capital and investment, referring to the need for greater policy certainty through long-term plans such as finalising the Mining Charter, withdrawing from the Minerals and Petroleum Resource Development Act Amendment Bill and re-examining South Africa’s visa requirements.
In terms of the re-prioritisation of public spending, there has been a great deal of speculation over where the funding for president Ramaphosa’s R50 billion stimulus package will come from, and what government will do with it.
Government will allocate R15.9 billion to infrastructure programmes, R16.5 billion to various programmes including restoring capacity at the South African Revenue Service (SARS), while the Land Bank is expected to conclude transactions in support of the agricultural sector to the value of R16.2 billion years over the next three to five years.
If government is able to fulfil these commitments while reducing inefficiencies, then this spending should support job creation and drive economic growth, said Ackerman.
It may take time, but confidence will return
“The message is clear: although the numbers are now weaker than in February, it is not because we have the wrong plan in place (as was the case last year). We do have the right plan but it will take time to deliver, as long as we can stay on course.
“Although the economy may look a little bit weaker over the medium term, eventually these policies will restore confidence and attract investment back into South Africa,” said Ackerman.