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<\/a><\/p>\nGrowth has collapsed, said Reza Hendrickse, portfolio manager at PPS Investments. He said that in the context of South Africa\u2019s public finances, the big question remains the ballooning debt burden.<\/p>\n
South Africa\u2019s debt-to-GDP ratio is now expected to peak at 95.3% in 2025\/6, compared previously to 87.4% in 2023\/4, which is in keeping with the progressive shifting of these goalposts over the years, Hendrickse said.<\/p>\n
“National Treasury is focused on trying to reduce debt servicing costs, which at current yields is crowding out most investments, and making it hard for government to prioritize anything else,” he said.<\/p>\n
Mike van der Westhuizen, portfolio manager at Citadel said that the June supplementary budget had already made it clear that South Africa was in a dire financial state. So, from that perspective, the medium term budget offered very little in the way of surprises.<\/p>\n
Of more concern is the fact that South Africa\u2019s alarming national debt trajectory \u2013 expected to reach 95.3% of GDP by 2025\/26 \u2013 is based on a number of highly optimistic assumptions,” he said.<\/p>\n
He said that South Africa\u2019s economic growth needs to reach above 3% for the country to escape its current debt spiral.<\/p>\n
“But unfortunately, based on the Mboweni\u2019s budget update, achieving this 3% doesn\u2019t seem realistic at all, given that government is essentially shifting funds away from productive spending in education and healthcare in order to prop up financially insolvent State-Owned Enterprises (SOEs).<\/p>\n
“While this will ensure that further allocations towards SOEs are deficit-neutral, it is essentially a case of stealing from Peter to give to Paul, or rearranging the deck chairs in order to hide the cracks appearing on the floor.”<\/p>\n
Focus on growth rather than spend<\/strong><\/p>\n Mike Teuchert, tax partner at Mazars in South Africa, said that government should orientate itself around growing the economy.<\/p>\n \u201cWe need to see a mindset change from the government that it\u2019ll focus less on social spending and bailing out failing SOEs that aren\u2019t contributing to growth, and more on ways in which it can foster economic growth.\u201d<\/p>\n Clearly demonstrating the precarious financial situation South Africa finds itself in, where emerging and developing economies are expected to contract 3.3% this year before rebounding to grow 6% in 2021, South Africa\u2019s economy is expected to decline 7.8% in 2020 before rebounding from a low base to achieve 3.3% growth in 2021, said Van der Westhuizen.<\/p>\n “In other words, the local economy is expected to drop twice as much as our peers, and bounce back by only half the amount.<\/p>\n “Yet Mboweni\u2019s speech lacked any sense of urgency, failing to address the concerns of local and foreign investors or provide any detail on how government intends to stabilise the growing budget deficit.<\/p>\n “Even more alarmingly, just four months after the supplementary budget, expenditure numbers were already higher than June\u2019s estimates, while revenue numbers were lower \u2013 facts which do not bode well for government\u2019s own forecasts,” he said.<\/p>\n With only four months left to the 2021 February budget speech, should this same trend continue, government will need to increase taxes, despite Mboweni\u2019s note that government will not be relying on taxes to do the heavy lifting in terms of relieving government\u2019s debt burden, said Van der Westhuizen.<\/p>\n “The most contentious of these increases would be the rumoured Solidarity Tax, which would simply place a positive spin on a wealth tax in an attempt to foster goodwill,” he said.<\/p>\n David French, tax consulting Director at Mazars in South Africa said that it was good that the minister publicly aired his view that tax increases are not the most effective means to generate revenue and that they can be detrimental to GDP.<\/p>\n \u201cIt sounds counter-intuitive that you\u2019d want to reduce taxes, but the reality is that, over time, this is what will stimulate the growth we so badly need,” said Mazar’s Sacks.<\/p>\n
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