A tax, economic review of SA’s 2018 budget

SA Finance Minister Gigaba delivers 2018 budget (Full speech

Minister Rob Davies comments on the 2018 budget speech

(PRETORIA) South Africa’s Budget 2018 speech and review was an uplifting read unlike Finance Minister Malusi Gigaba’s 2017 Medium Term Budget Policy Statement (MTBPS), which led South Africa down a spiral characterised by slow economic growth, recession, ratings downgrades, and heightened concerns regarding the governance and sustainability of key state-owned companies.
FOR MORE VISIT <a href="http://cnbc.africa/category/insights/budget-day/budget-2018-sa/">BUDGET 2018 &#8211; SA</a>
Even Gigaba’s Budget lockup press conference on Wednesday was more upbeat than last year’s MTBPS’s. He had the confidence and swagger of man who believes he has averted further downgrades for South Africans. But for the wealthy and lovers of the finer things in life from smartphones to Gucci handbags &#8211; Budget 2018 makes for sombre reading.
If you’re wealthy or love the finer things in life this is how you’ll be impacted
<ul>
<li>VAT rate to increase from 14% to 15%. The wealthiest 30% of households contribute 85% of VAT revenue.</li>
<li>Products such as rye or low GI bread which are more expensive will not be zero-rated. This type of bread tends to be consumed by richer households.</li>
<li>There’ll will be no adjustments to the top four income tax brackets</li>
<li>Ad-valorem excise duty rate on luxury goods to increase from 7% to 9%.</li>
<li>Effective 1 April 2018, the maximum ad valorem excise duty for motor vehicles will increase from 25% to 30%.</li>
<li>Classification of cellular telephones will be updated to include “smartphones” to ensure they attract ad valorem excise duties.</li>
<li>Government will consult on a proposal to replace the flat rate for cellphones with a progressive rate structure based on the value of the phone.</li>
<li>From March 1 a higher estate duty tax rate of 25% for estates greater than R30mn will be introduced. To limit the staggering of donations to avoid the higher estate duty rate, any donations above R30mn in one tax year will also be taxed at 25%.</li>
</ul>
&nbsp;

SA #Budget2018: A tax on the wealthy, and smartphones

By Aviwe Mtila
South Africa’s state-owned companies (SOCs) continue in financial disarray with combined profits falling from 0.8 per cent in 2015/16 to 0.3 per cent in 2016/17.
This was revealed in South Africa’s 2018 budget speech, tabled by the country’s Finance Minister, Malusi Gigaba, on Wednesday in parliament. In acknowledging the challenges with growing South Africa’s economy in 2017, Gigaba highlighted poor governance as the major hindrance of SOCs.
“The year was characterised by slow economic growth, recession, ratings downgrades, and heightened concerns regarding the governance and sustainability of key state-owned companies,” says Gigaba.
Capital spending by the major state-owned companies is projected at R368.2 billion over the medium term with several in financial distress.
In recent years, South Africa’s SOCs have been notorious for going to the government, cap-in-hand, asking for financial bailouts. In 2016/17, the six largest state-owned companies borrowed R98.1 billion. Earlier this year, even the country’s pensioners have bailed out the country’s power utility, Eskom, with a R5 billion loan through the Public Investment Corporation.
In recent months, government has installed new boards and senior managers at Eskom and South African Airways, with a mandate to stabilise these entities and restore good governance.
“State-owned companies are expected to fund their own operations… it is not fair for taxpayer money to be used for continual bailouts, caused by operational inefficiency and financial mismanagement,” says Gigaba.
Gigaba pledged to assist SOCs with a turnaround plan. He did not rule out supporting them financially in coming years, which he says could be done through a combination of disposing of non-core assets, strategic equity partners, or direct capital injections.
In this regards, Gigaba eluded to a property audit conducted by the Department of Public Works which shows that national government owns up to 195 000 properties, with an estimated value of over R40 billion.
“We will work with them on a programme to better utilize or dispose of these properties in the short to medium term. Government is finalising a framework on guarantees aimed at both reducing the exposure and improving the quality of the guarantee portfolio,” says Gigaba.
The Finance Minister further solidified that government will ensure that all SOCs are run sustainably and contribute to national development.

Budget 2018: Financial Woes Continue To Plague S.A’s Profit-lacking SOCs

By Aviwe Mtila
South Africa’s ailing economy takes a turn for the better with a GDP growth of 1 per cent for 2017, up from 0.7 per cent in October and forecasted to reach 2.1 per cent by 2020.
This is the word from South Africa’s Finance Minister, Malusi Gigaba, as he tabled the country’s 2018 budget on Wednesday in parliament. The minister attributes this to strong growth in agriculture, higher commodity prices and, in recent months, improving investor sentiment.
“We are anticipating growth of 1.5 per cent in 2018, rising to 2.1 per cent in 2020. While this is a good start, there are immediate policy interventions that we need to make to ensure that we create the right environment for investment, growth and employment,” says Gigaba.
South Africa has seen private investment contracting since 2015, mainly as a result of low levels of business and consumer confidence. Growth has remained stuck below 2 per cent and unemployment remaining high at 26.7 per cent.
In creating large numbers of jobs, build an inclusive and transformed economy and reduce inequality, experts say South Africa needs a strong, sustained expansion. In his speech, the Finance Minister says this will be possibly by raising the level of investment and improving the ease of doing business.
“South Africa needs to be bold and coordinated in building sectors where we have comparative advantage and can be truly world class. These include, but are not limited to: mining, agriculture, tourism, as well as manufacturing and service exports to the rest of Africa and globally,” says Gigaba.
Although global risk factors remain elevated, the world economy continues to provide a supportive platform for South Africa to expand trade and investment.
Budget 2018 notes that the world economic growth is at its highest level since 2014 and continues to gather pace. GDP growth is rising across all major economies. This will assist South Africa further in its growth trajectory says the Finance Minister.
“Investment opportunities are occasioned by the following global developments in our main trading partners: Stronger domestic demand in the US and the euro area has supported an improved growth outlook… The recovery in commodity prices has also supported developing countries growth prospects… sub-Saharan Africa is expected to grow at 3.3 per cent in 2018,” says Gigaba.
This is the perfect opportunity for Inclusive Growth and Economic Transformation the Finance Minister said.

Budget 2018: Slight Growth in S.A’s GDP Provides Hope for Investments

By Aviwe Mtila
While South Africa’s economic and political woes are facing prospects of a new dawn with its recent change in leadership, a lot of uncertainty still lies ahead.
As the country’s Finance Minister, Malusi Gigaba, tabled his maiden budget speech in parliament on Wednesday, rating agencies, investors and the world are watching closely like a teacher with a red pen in hand.
The decisions and direction South Africa takes going forward will be crucial in steering the country out of its ailing economy in to the road of growth and prosperity.
South Africa’s Budget 2018 noted the following as risks to the economic and fiscal outlook:
<ul>
<li>The recovery in economic growth is not yet broad-based. Much depends on continued improvements in political and policy certainty, and a supportive global environment. Tax buoyancy, which declined over the past two years, may not increase as quickly as projected.</li>
<li>Talks on a new public-service wage agreement are in progress. An agreement locking in salary increases that exceed consumer price index inflation would make expenditure limits difficult to achieve.</li>
<li>While decisive action by government to strengthen governance at Eskom has staved off the likelihood of near-term default, the financial positions of the power utility and several other large entities pose risks to the economy and the fiscus.</li>
<li>The costs associated with fee-free higher education and training are uncertain. The Department of Higher Education and Training will need to ensure that its plans are aligned with allocations.</li>
<li>A sub-investment downgrade for local- and foreign-currency debt by Moody’s would result in South Africa’s exclusion from the Citi World Government Bond Index, triggering a sell-off of South African debt. This would raise future borrowing and debt-service costs.</li>
</ul>

Budget 2018: S.A’s Economic Risks Still Elevated, Even with Green Shoots In Sight

By Monique Vanek
(PRETORIA) For the first time since 1993 Treasury has decided to hike South Africa’s value-added tax (VAT) by one percentage point to close its revenue shortfall gap of R48.2bn in 2018.
In its Budget Review it said the decision was taken as it was estimated “to have the least detrimental effects on economic growth and employment over the medium term”. Also when compared to other countries it was among the lowest, unlike corporate tax (see graphs below).
<img loading="lazy" decoding="async" class="alignnone wp-image-299612" src="http://cnbc.africa/wp-content/uploads/2018/02/VAT-rates-by-country-300x202.png" alt="" width="600" height="404" />
<img loading="lazy" decoding="async" class="alignnone wp-image-299613" src="http://cnbc.africa/wp-content/uploads/2018/02/Corporate-income-tax-as-share-of-GDP-300x248.png" alt="" width="599" height="495" />

How SA’s new VAT rate compares to the rest of the world

By Monique Vanek
(PRETORIA) Government faces a revenue gap of R48.2bn in 2018. This was revealed by South Africa’s Finance Minister Malusi Gigaba in his maiden Budget speech on Wednesday. To address this shortfall, Treasury plans to hike value-added tax (VAT), for the first time since 1993 as well as place a greater burden of tax on wealthy South Africa, whilst protecting the most vulnerable. Although, tax revenue collections for 2017/18 are expected to marginally outperform projections set out in the 2017 Medium Term Budget Policy Statement (MTBPS), Gigaba in his speech argued that acting now will improve the economic outlook and increase space for investment growth.
Treasury in its Budget Review argues that the decision to increase the VAT rate by one percentage point was taken as it was estimated “to have the least detrimental effects on economic growth and employment over the medium term”.
Tax Proposals
The tax proposals will generate an additional R36bn in tax revenue for 2018/19.The largest contributor will be the R22.9 billion from the one percentage point increase in VAT and R6.8 billion from lower-than-inflation increases to the personal income tax rebates and brackets.
The main proposals are:
<ul>
<li>VAT rate to increase from 14% to 15%.</li>
<li>Zero-rating of basic food items will limit impact on poorest households.</li>
<li>Brown bread and whole wheat brown bread will be zero-rated. Products such as rye or low GI bread will not be zero-rated.</li>
<li>Personal income tax rebates &amp; brackets to increase below inflation, see table below.</li>
<li>No adjustments to the top four income tax brackets, and below inflation adjustments to the bottom three brackets.</li>
<li>Ad-valorem excise duty rate on luxury goods to increase from 7% to 9%.</li>
<li>Effective 1 April 2018, the maximum ad valorem excise duty for motor vehicles will increase from 25% to 30%.</li>
<li>Classification of cellular telephones will be updated to include “smartphones” to ensure they attract ad valorem excise duties.</li>
<li>Government will consult on a proposal to replace the flat rate for cellphones with a progressive rate structure based on the value of the phone.</li>
<li>From March 1 a higher estate duty tax rate of 25% for estates greater than R30mn will be introduced. To limit the staggering of donations to avoid the higher estate duty rate, any donations above R30mn in one tax year will also be taxed at 25%.</li>
<li>52c/l increase in fuel levies: &#8211; comprising 22c/l for general fuel levy &amp; 30c/l in Road Accident Fund levy.</li>
<li>Alcohol &amp; tobacco excise duties to increase between 6 &amp; 10%.</li>
<li>Carbon Tax Bill expected to be enacted before the end of 2018. Tax to be implemented from 1 January 2019.</li>
<li>Plastic bag levy to be increased by 50% to 12 cents per bag, effective 1 April 2018.</li>
<li>From 1 April, environmental levy on incandescent light bulbs will increase from R6 to R8 to incentivise more energy-efficient behaviour.</li>
<li>Vehicle emissions tax will be increased to R110 for every gram above 120 gCO2/km for passenger vehicles and R150 for every gram above 175 gCO2/km for double cab vehicles, effective 1 April 2018.</li>
<li>Government will publish a discussion document outlining design options for the proposed acid mine drainage levy.</li>
<li>Health promotion levy, which taxes sugary beverages, will be implemented from 1 April 2018.</li>
<li>Over the next three years, below-inflation increases in medical tax credits will help government to fund the rollout of national health insurance. Government will increase the medical tax credit from R303 to R310 per month for the first two beneficiaries, and from R204 to R209 per month for the remaining beneficiaries. The medical tax credit will be reviewed after the Davis Tax Committee presents its recommendations.</li>
</ul>
<img loading="lazy" decoding="async" class="alignnone wp-image-299602" src="http://cnbc.africa/wp-content/uploads/2018/02/Budget2018-tax-graphic-300x209.png" alt="" width="653" height="455" />
Treasury’s Budget Review also highlights that it has taken years to build the foundation of trust that underpins South Africa’s tax morality. But such trust is fast eroding; to combat this the president will establish a commission of inquiry into the functioning and governance of the South African Revenue Service (SARS). Steps will also be taken to improve the governance and accountability of SARS, and to strengthen the operational independence of the Tax Ombud.

SA’s #Budget2018 tax changes highlighted: VAT to increase

S.A pre-budget analysis for 2018

Why Gigaba has to do the unpopular thing and increase VAT

By  Old Mutual Investment Group’s Head of Economic Research, Johann Els
The shocking abandonment of fiscal consolidation as a key policy anchor in the October 2017 Medium Term Budget Policy Statement (MTBPS) led to the downgrade to sub investment grade by S&amp;P and the credit watch by Moody’s.
Since then, however, the accelerated speed at which events have moved – mostly in a positive direction – has been encouraging, despite being unexpected. Considering that newly sworn in President Ramaphosa has strong business experience and was heavily involved in the creation of the acclaimed National Development Plan (NDP), it is more likely now that the ANC will return to their more pragmatic policies.
It is against this backdrop that Old Mutual Investment Group’s Head of Economic Research, Johann Els, believes the upcoming budget will need to be a lot tougher than what South Africa has seen in the recent past. “While we do expect a somewhat better economic environment during 2018, which should marginally improve the fiscal numbers, a clear return to fiscal consolidation is needed. This should include both revenue and expenditure measures to speed up narrowing of the budget deficit in a more sustainable manner in order to stabilise the debt ratio.”
Els warns, however, that this will not be easy and will likely be painful to most taxpayers. “Minister Gigaba has mentioned in parliament, following the MTBPS fiasco, that an extra R30bn in taxes would need to be raised in this Budget. While a tighter fiscal stance is clearly needed, it would also need to be balanced with the need to not hurt economic growth too much – a key requirement by Moody’s.
<iframe loading="lazy" width="560" height="315" src="https://www.youtube.com/embed/PvEi6S_yXwI" frameborder="0" allow="autoplay; encrypted-media" allowfullscreen></iframe> 
“Thus, significant tax hikes are needed and would likely be concentrated at the top end of the income spectrum,” explains Els.
He outlines a number of options by which this could be done. “Fiscal drag, i.e. not making allowance for inflation pushing taxpayers into higher tax brackets, could raise R10bn, and an additional top marginal tax rate could result in a further R4-R5bn. R16bn could be raised by reducing tax expenditures via levying VAT on petrol (or alternatively a hefty fuel levy hike), while eliminating medical tax credits could raise R18bn (or R4-5bn if only for higher income groups). Since a wealth tax will probably not yet be introduced, capital gains tax and dividends tax rates could be raised again, along with normal excise and sin tax hikes, as well as the sugar tax.”
The big positive, however, would be a possible hike to the VAT rate, says Els. “While government has always said they will keep a VAT hike for when National Health Insurance is introduced, circumstances dictate that it might be necessary to consider this now. I do think that the probability of a VAT hike is higher now than over the past few years.
“A 1% hike in the VAT rate from 14% to 15% will raise around R20bn. Thus, a 2% hike could raise additional revenue of R40bn. Even if some of this is ‘given back’ as additional increases in social grants or additional zero rated goods, significant amounts could be raised which could make a serious impact on the budget. The probability of a tiered VAT rate structure has also become somewhat more probable. This, for example, could come in the form of a higher rate for luxury goods (20%?) and a still higher rate (30%?) for ultra-luxury goods.”
Within such an environment – coupled with likely sustained improvement in business and consumer confidence – Els predicts better economic growth for 2018. “There might even be some upside to our already above consensus 1.8% GDP growth forecast for 2018. This is a decent uplift from the 0.3% GDP growth in 2016 and the estimated 0.9% growth in 2017.
“Should politics continue to improve and the Budget marks a return to fiscal consolidation, then Moody’s might be willing to postpone a credit rating downgrade and the Rand could hold onto its gains. Under such circumstances inflation is likely to remain low – and likely lower than the Reserve Bank’s (SARB) forecast. Our own inflation forecast of 4.4% average for 2018 – already below consensus – could mean inflation rates below 4% over the next few months. This, combined with tighter fiscal policy, could lead to circumstances where the SARB could consider restarting its cutting cycle. We expect three rate cuts this year of 25 basis points each.”
Els concludes that while there are still many uncertainties, it seems reasonably clear that the improved political backdrop provides potential for a more positive outlook for 2018 than before. “The local currency and investment markets have already moved quite sharply to reflect much of this.

#Budget2018 needs to be tougher than what SA has seen in the recent past

By Lullu Krugel is Chief Economist for PwC Africa
<h2>Context</h2>
In his “New Deal” for reigniting job creation and economic growth, President Cyril Ramaphosa identifies the need to restore State-Owned Enterprises
 (SOEs) as drivers of economic growth and social development.<a href="#_ftn1" name="_ftnref1">[1]</a> President Ramaphosa admitted in his State of the Nation Address (SONA) 2018 that SOEs “are experiencing severe financial operation and governance challenges”.<a href="#_ftn2" name="_ftnref2">[2]</a> Finance Minister Malusi Gigaba is scheduled to deliver his 2018 Budget Speech on 21 February, and is expected to make particular reference to the financial health of SOEs.
<h2>Background</h2>
SOEs have a crucial role in maintaining the basic infrastructure of South Africa. Some of the main sectors where SOEs are dominant include electricity, transport, mining, water, and telecommunications. In the 2015/16 financial year, the overall financial position of SOEs improved, compared to the previous year. This was mostly due to capital investment and positive earnings.<a href="#_ftn3" name="_ftnref3">[3]</a> However, at present, numerous SOEs are facing financial difficulties, which has led to credit rating downgrades and, in turn, increased financial deficits.
Table 1: Increasing rates of exposure on government guarantees
<table width="658">
<tbody>
<tr>
<td width="204"> </td>
<td colspan="3" width="227">2015/16</td>
<td colspan="3" width="227">2016/17</td>
</tr>
<tr>
<td width="204"> </td>
<td width="76">Guarantee (Rbn)</td>
<td width="76">Exposure<a href="#_ftn4" name="_ftnref4">[4]</a> (Rbn)</td>
<td width="76">Exposure
%</td>
<td width="76">Guarantee (Rbn)</td>
<td width="76">Exposure (Rbn)</td>
<td width="76">Exposure
%</td>
</tr>
<tr>
<td width="204">Public Institutions</td>
<td width="76">469.9</td>
<td width="76">255.8</td>
<td width="76">54%</td>
<td width="76">477.7</td>
<td width="76">308.3</td>
<td width="76">65%</td>
</tr>
<tr>
<td width="204">Eskom</td>
<td width="76">350.0</td>
<td width="76">174.6</td>
<td width="76">50%</td>
<td width="76">350.0</td>
<td width="76">218.2</td>
<td width="76">62%</td>
</tr>
<tr>
<td width="204">SANRAL</td>
<td width="76">38.9</td>
<td width="76">27.2</td>
<td width="76">70%</td>
<td width="76">38.9</td>
<td width="76">30.1</td>
<td width="76">77%</td>
</tr>
<tr>
<td width="204">Trans-Caledon Tunnel Authority</td>
<td width="76">25.8</td>
<td width="76">21.2</td>
<td width="76">82%</td>
<td width="76">25.7</td>
<td width="76">20.7</td>
<td width="76">81%</td>
</tr>
<tr>
<td width="204">South African Airways (SAA)</td>
<td width="76">14.4</td>
<td width="76">14.4</td>
<td width="76">100%</td>
<td width="76">19.1</td>
<td width="76">17.9</td>
<td width="76">94%</td>
</tr>
<tr>
<td width="204">Land Bank SA</td>
<td width="76">6.6</td>
<td width="76">5.3</td>
<td width="76">80%</td>
<td width="76">11.1</td>
<td width="76">5.4</td>
<td width="76">49%</td>
</tr>
<tr>
<td width="204">Development Bank of Southern Africa (DBSA)</td>
<td width="76">13.9</td>
<td width="76">4.4</td>
<td width="76">32%</td>
<td width="76">12.7</td>
<td width="76">4.2</td>
<td width="76">33%</td>
</tr>
<tr>
<td width="204">SA Post Office</td>
<td width="76">4.4</td>
<td width="76">1.3</td>
<td width="76">30%</td>
<td width="76">4.4</td>
<td width="76">3.9</td>
<td width="76">89%</td>
</tr>
<tr>
<td width="204">Transnet</td>
<td width="76">3.5</td>
<td width="76">3.8</td>
<td width="76">109%</td>
<td width="76">3.5</td>
<td width="76">3.8</td>
<td width="76">109%</td>
</tr>
<tr>
<td width="204">Denel</td>
<td width="76">1.9</td>
<td width="76">1.9</td>
<td width="76">100%</td>
<td width="76">1.9</td>
<td width="76">1.9</td>
<td width="76">100%</td>
</tr>
<tr>
<td width="204">South African Express</td>
<td width="76">1.1</td>
<td width="76">0.5</td>
<td width="76">45%</td>
<td width="76">1.1</td>
<td width="76">1.0</td>
<td width="76">91%</td>
</tr>
<tr>
<td width="204">Industrial Development Corporation (IDC)</td>
<td width="76">2.0</td>
<td width="76">0.2</td>
<td width="76">10%</td>
<td width="76">1.9</td>
<td width="76">0.2</td>
<td width="76">11%</td>
</tr>
<tr>
<td width="204">South African Reserve Bank (SARB)</td>
<td width="76">3.0</td>
<td width="76">0.0</td>
<td width="76">0%</td>
<td width="76">3.0</td>
<td width="76">0.0</td>
<td width="76">0%</td>
</tr>
</tbody>
</table>
Source: National Treasury Budget Review 2017
The guarantees and exposure to SOEs pose a significant risk to South Africa’s fiscal position. The exposure increased from R174.6bn in 2015/16 to R218.2bn in 2016/17. In the past three years, the percentage exposure to guarantees increased from 47% in 2014/15 to 65% in 2016/17.<a href="#_ftn5" name="_ftnref5">[5]</a> The two SOEs with the largest exposure currently have sub-investment credit ratings: Moody’s Investors Service adjusted Eskom’s long-term credit rating to B1 (highly speculative) and SANRAL’s rating to Ba1 (non-investment grade – speculative) in November 2017.
Some of the reasons stated for the most recent downgrades are the preceding sovereign credit rating downgrades, governance challenges and the SOEs’ deteriorating liquidity levels. The downgrades limit SOEs funding options, since it deters risk adverse investors and investors with specific limitations to investing funds in sub-investment rated entities. The poor credit rating also influences the cost of lending money.
<h2>Recent developments</h2>
There were recent outcries from the Public Servants Association (PSA) after the Public Investment Corporation (PIC) provided Eskom with R5bn in financing, which consists mostly of government employees’ pension funds. The main concerns from the PSA are that this transaction contradicts previous assurances from the Government Employees Pension Fund (GEPF) that pension fund money will not be used to finance struggling SOEs.
In turn, the PIC argued that they were “encouraged that the new Eskom Board and the new management team have moved with the necessary speed to restore good corporate governance at Eskom”<a href="#_ftn6" name="_ftnref6">[6]</a>. The PIC indicated that it provided the money at a favourable rate of interest and that the loan is due in 30 days. Elsewhere, Eskom reported that three commercial banks have indicated that they were willing to extend their credit facilities, pending the outcome of their respective due diligence processes.
Figure 1: Increasing fiscal exposure to fragile SOEs
Source: National Treasury Budget Review 2017
<h2>Looking ahead</h2>
Finance Minister Malusi Gigaba explained in 2017 that there will be more stringent procedures in place going forward regarding future SOE funding. He mentioned that the executives of the SOEs should take responsibility for the management of the SOEs, since they are paid “competitive salaries” and that “the public and government are correct to expect a great deal from them”. He further emphasised that the SOEs reliance on bailouts must end. “As the shareholder, we [the National Treasury] are tired of being dragged into crises by those we employ to govern and manage state-owned companies. This must end.” <a href="#_ftn7" name="_ftnref7">[7]</a>
President Ramaphosa promised in SONA 2018 that the government would “intervene decisively to stabilise and revitalise SOEs”. He acknowledged that some of these entities “do not have a sufficient revenue stream to fund their operational costs”, and that they “cannot borrow their way out of their financial difficulties”
SOEs have a crucial role to play in long-term economic development and transformation and should add to economic growth and stability. SOEs are a key source of jobs in South Africa, employing more than 300 000 people.
The finance minister must navigate an intricate balancing act between bailing out SOEs and dealing with credit rating agencies threatening more rating downgrade.<a href="#_ftn8" name="_ftnref8">[8]</a> Ideally, SOEs should not require recurring cash injections from the state. While the government is the main shareholder in these entities, shareholders of other big companies are seldom asked to make annual contributions to the financial wellness of these corporations.
The 2018 Budget needs to set in motion tangible plans to achieve Mr Ramaphosa’s ideal of restoring SOEs as drivers of economic growth and social development. Proper accountability structures will improve the quality of governance at these companies which, in turn, would aid the financial health of SOEs. Improved financial management would eventually translate into improved credit ratings which, in turn, will encourage a greater volume of financiers to invest in SOEs. The result will be a decline in fiscal exposure to the performance of SOEs. Looking beyond Budget 2018, President Ramaphosa is looking to undertake a process of consultation with a variety of stakeholders to comprehensively review the funding models of SOEs.
<a href="#_ftnref1" name="_ftn1">[1]</a> BizNews, 2017. Ramaphosa: My New Deal for SA – and 10-point action plan for jobs, growth, transformation. 
https://www.biznews.com/thought-leaders/2017/11/14/ramaphosa-new-deal-for-sa/
<a href="#_ftnref2" name="_ftn2">[2]</a> http://www.thepresidency.gov.za/speeches/state-nation-address-president-republic-south-africa%2C-mr-cyril-ramaphosa
<a href="#_ftnref3" name="_ftn3">[3]</a> National Treasury, 2017, Budget Review. http://www.treasury.gov.za/documents/national%20budget/2017/review/Chapter%208.pdf
<a href="#_ftnref4" name="_ftn4">[4]</a> Exposure is defined as the total amount of borrowing and accrued interest for the period made against the guarantee.
<a href="#_ftnref5" name="_ftn5">[5]</a> National Treasury, 2017, Budget review. http://www.treasury.gov.za/documents/national%20budget/2017/review/FullBR.pdf
<a href="#_ftnref6" name="_ftn6">[6]</a> Business Report, 2018, PIC will bail out Eskom with a R5 billion loan. 
https://www.iol.co.za/business-report/energy/pic-will-bail-out-eskom-with-a-r5-billion-loan-13113950
<a href="#_ftnref7" name="_ftn7">[7]</a> Fin24, 2017, Gigaba: Transnet, Eskom, SAA critical for transformation. 
https://www.fin24.com/Budget/gigaba-transnet-eskom-saa-critical-for-transformation-20171025
<a href="#_ftnref8" name="_ftn8">[8]</a> Mail &amp; Guardian, 2018, Steven Friedman: State-owned enterprises shouldn’t be used as pawns in South African politics. <a href="https://mg.co.za/article/2017-09-19-state-owned-enterprises-shouldnt-be-used-as-pawns-in-south-african-politics">https://mg.co.za/article/2017-09-19-state-owned-enterprises-shouldnt-be-used-as-pawns-in-south-african-politics</a>

#Budget2018 needs to address the elephant in the room – State-Owned Enterprises

By Bravura
Konrad Reuss, S&amp;P Global Ratings MD for sub-Saharan Africa and SA, gave a sobering view on S&amp;P’s views on the South African economy at the GIBS Economic Outlook conference held earlier today.
He said that South Africa’s investments grade status recovery depends on <a href="https://twitter.com/hashtag/reform?src=hash">reform</a> of fiscal policy, public sector reform and the willingness of the South African population to take pain to achieve it. He also mentioned that South Africa has not recovered in a meaningful way since <a href="https://twitter.com/hashtag/global?src=hash">the global</a> financial crisis in 2008.  In his view, South Africa lags behind both the world and emerging markets.
“SA’s first challenge is to improve economic growth, but perhaps our larger challenge, given high levels of income inequality, is to make sure growth is equitable and has wide distribution that will reduce inequality.  Improvements in income distribution are key measures of achieving inclusive growth, although we must go beyond traditional measures (GDP per Capita) to monitor progress.”
Soria Hay, Head of Corporate Finance at Bravura comments: “Standard &amp; Poor downgraded its credit rating for South Africa in November 2017 to BB (below investment grade). This decision by S&amp;P led to South Africa being excluded from the Barclays Global Aggregate index, whose inclusion criteria requires investment grade rating on its local currency debt from any two ratings agencies. Fitch already downgraded South Africa’s credit rating to BB+ in April 2017, and this meant that South Africa was excluded from the Barclays index as well as the JPMorgan Emerging Market Bond Index Global.”
Moody&#8217;s adopted a “wait and see approach”, and retained South African debt ratings at investment grade, but put it on review for downgrade. Moody’s said at the time that the review period will allow the rating agency to assess the South African authorities’ willingness and ability to respond to the rising pressures through growth-supportive fiscal adjustments that raise revenues and contain expenditures; structural economic reforms that ease domestic bottlenecks to growth; and improvements to SOE governance that contain contingent liabilities.”
Hay says: “The future of South Africa’s credit ratings hangs in the balance as the world waits to see what the 2018 budget will deliver.  The finance minister is expected to announce plans to plug a R50-billion hole in revenues, and will also have to provide for other demands – such as free higher education for students from low-income households which is expected to cost up to R15-billion for this financial year.
The plan to address these issues, and many more that weigh on the budget, will provide clarity as to whether South Africa’s credit rating is doomed to be further downgraded into junk territory – or if a grace period will allow for the country to prove it can turn its fortunes around.”
After the medium-term budget policy statement budget, Moody’s expressed concern, noting that SA’s interest payments ratio exceeds the median of its peer ratings group.  According to Moody’s, more than a third of all sovereign defaults occur when countries allow fiscal imbalances to persist, resulting in unsustainably high debt burdens. When they are no longer able to service or reduce their debt, downgrades invariably follow.
S&amp;P Global warned that non-resident ownership of South African local currency debt was now at 45%.  Hay explains why this poses a potential risk: “If both Moody’s and S&amp;P downgraded South Africa’s local currency debt to junk, South African bonds would fall out of the Citigroup’s World Government Bond Index (WGBI), causing large international tracker funds to sell out of their holdings of such bonds.
Ejection from the crucial bond indexes means passive investors mandated to invest in local bonds would automatically have to withdraw from those investments. Downgrades to sub-investment grade could trigger forced selling of up to as $14bn of outflows, according to the Bank of America. If Moody’s, also downgrades South Africa, then far greater losses on the Rand can be expected. The Rand could depreciate rapidly, causing inflation to increase, putting upward pressure on interest rates and downward pressure on economic growth.”
S&amp;P Global is concerned about the low growth environment in South Africa, and also the economic inequality that exists in the country.  Hay comments that the GDP per capital expressed in USD has declined by 30% since 2012.
South Africa &#8211; GDP per capita (USD) Data (Source: FocusEconomics S.P.)
<table width="611">
<thead>
<tr>
<td></td>
<td>2012  </td>
<td>2013  </td>
<td>2014  </td>
<td>2015  </td>
<td>2016  </td>
</tr>
</thead>
<tbody>
<tr>
<td>GDP per capita (USD)</td>
<td>7,599</td>
<td>6,704</td>
<td>6,621</td>
<td>6,065</td>
<td>5,299</td>
</tr>
</tbody>
</table>
&nbsp;
S&amp;P Global commented: “We could raise the ratings if economic growth or fiscal outcomes strengthen in a significant and sustained manner compared with our base case. Upside ratings pressure could also rise if risks of a marked deterioration in external funding sources were to subside, in our view, and external imbalances decline. Upward pressure on the ratings could also develop were policy makers to introduce economic reforms to benefit job creation, competitiveness, and economic growth.”
S&amp;P Global warned that the average time that it takes a country to move back to investment grade after it has been down-graded, is an average of 8.3 years; ranging from slightly more than a year for South Korea (between December 1997 and January 1999) to more than 19 years for the recent upgrade of Indonesia (between December 1997 and May 2017).
Interestingly, numbers are similar for movements in the opposite direction. It also took an average of 8.3 years for the nine sovereigns in the rising star category to lose their investment-grade ratings. It took South Africa more than 17 years for South Africa (between February 2000 and April 2017.
Hay concludes: “We are at a crossroads.  South Africa will only through a concerted effort by government and business reach its full potential. To a very large extent, the private sector holds the key, but government holds the door.”
*Bravura Holdings Limited is an independent investment banking firm specialising in corporate finance and structured solutions services.  Bravura Holdings has a primary listing on the Stock Exchange of Mauritius and a secondary listing on the NSX.  It has offices in Mauritius, South Africa, Namibia and Australia.

What S&P is eyeing in SA’s #Budget2018

By Nazmeera Moola, co-Head of Fixed Income, Investec Asset Management
After the euphoria of South Africa&#8217;s President Ramaphosa’s SONA, the 2018 Budget speech due tomorrow will bring South Africa down to earth with a bit of a bump.  The President said that hard choices will be needed – but making hard choices in five days is a big ask!
After spending a week immersed in the details of the budget, I’ve come to a few conclusions:
<ol>
<li>A higher growth trajectory solves most ills.  South Africa’s growth forecasts were moved dramatically lower between the February 2017 Budget and the October 2017 MTBPS.  This was due to the sluggish growth outlook and weak revenue collection.  With some real chance of structural reforms after the change in president, it looks possible that growth moves back to 2.5% in 2020 and 3% in 2021.  This is still below the Treasury’s forecasts from February 2017, but will be enough to stabilise the growth outlook.</li>
<li>Around R45bn of tax hikes and spending cuts are needed in the fiscal year that starts 1 April 2018 to stabilise the South African fiscal outlook.  With free tertiary education weighing on the fiscus, it will be difficult to achieve the R31bn in expenditure cuts that were planned.  At most R15bn is likely.  Therefore, tax hikes of around R30bn are needed.  Last year, personal income taxes (PIT) bore the brunt of the adjustment, with very little offset provided for inflation in the tax brackets.  As a result, households earning from R350 000/annum saw a decline in real wages due to limited tax relief for inflation.  While that maneuver can be repeated this year, it is woefully inefficient – and did not raise nearly the amount of expected revenue in 2017.</li>
<li>A far better option is to hike VAT by at least 1%. Tax increases are always an emotive subject.  Value Added Tax or VAT is particularly so.  The main argument against an increase in the VAT rate is that this tax is regressive.  A regressive tax is one where the proportion of an individual’s income expended on that tax falls as they progress up the income scale.  The reasoning is that since lower income earners spend a greater proportion of their income on goods and services and save less, they also spend a higher share of their wages on VAT than lower income earners.</li>
</ol>
While this is true in developed markets, in South Africa, the situation is a bit more nuanced.  A February 2015 study by Ingrid Woolard and a few colleagues published in the World Bank paper titled The distributional impact of fiscal policy in South Africa, shows that VAT in South Africa would be regressive in the absence of the zero-rated food items.
The authors found that VAT is broadly neutral in South Africa.  This means that households across the income brackets pay roughly the same proportion of their income on VAT.  The conclusion is that VAT does not make inequality better or worse in South Africa.
With the inclusion of zero-rated goods, VAT becomes slightly progressive.  This means that higher income earners pay a slightly higher proportion of their income on VAT when zero-rated goods are taken into consideration than lower income earners.    This can be expanded by further increasing the zero rated items.
Moreover, work by the Davis Tax Committee found that a hike in VAT has the smallest negative impact on overall growth and job creation – relative to measures required to raise the same amount of revenue from corporate and/or personal income tax hikes.
As an aside, the authors also found that excise duties are regressive – this was because poorer households expend a greater proportion of their spending on cigarettes and alcohol.  A 1% increase in VAT would raise extra revenue of ZAR23bn.  The conclusion is that the least bad option for South Africa in February 2018 is a VAT hike.

#Budget2018: Why hiking VAT might not be such a bad idea

S.A budget expectations for 2018

Fitch Ratings-Hong Kong/London-26 October 2017: South Africa&#8217;s (BB+/Stable) Medium-Term Budget Policy Statement (MTBPS) projects a sharp fall in fiscal revenue, but has no measures to contain the impact on deficits and debt, Fitch Ratings says. This suggests that the change in direction of policy making away from a focus on fiscal consolidation that we anticipated as a consequence of March&#8217;s cabinet reshuffle is under way and occurring faster than we had expected.
<a href="http://cnbc.africa/category/insights/budget-day/mtbps-2017/">Click here for more on MTBPS</a>
Wednesday&#8217;s MTBPS is the first major fiscal announcement since Malusi Gigaba was appointed Finance Minister in March. The government no longer forecasts stabilising debt, having raised its forecast for gross loan debt (its measure of consolidated government debt) to 58.2% of GDP for the financial year to end-March 2020 (FY19/20) from 52.4% previously. It expects a further rise to 60.8% by FY21/22.
This reflects large upward revisions in the Treasury&#8217;s consolidated government deficit forecast, to 4.3% of GDP (1.2pp wider than in the February budget) this year with only a moderate improvement to 3.9% next year and no further reduction in the two following years. Previously, the government had projected a decline to 2.6% in FY19/20.
The revisions reflect significant revenue shortfalls, of ZAR50.8 billion (1.1% of GDP) in FY17/18, as a result of lower GDP growth (now predicted to be 0.7% in 2017, down from 1.3% in the budget) and lower-than-expected tax buoyancy (the increase in tax revenues for a given increase in GDP). The government&#8217;s GDP growth forecasts are now in line with or lower than Fitch&#8217;s. However, there remains a substantial risk of additional revenue slippage if tax buoyancy fails to recover.
The MTBPS also raises questions about the role of the non-interest expenditure ceiling as a key fiscal policy anchor. The statement predicts that spending will exceed the ceiling set in February&#8217;s budget by ZAR4 billion in FY17/18, driven by the recapitalisation of South African Airways and South African Post Office. The amount is small at 0.1% of GDP, and the government is looking for ways to make the recapitalisation revenue-neutral so that a breach of the ceiling could still be avoided. But the fact that a breach is included in official projections points to a significant loss of credibility for this policy tool.
There are substantial risks to the ceiling from the expenditure side. Public-sector wage negotiations are under way, with a large divergence between trade union demands and MTBPS wage bill projections. The government also noted that capital injections for other state-owned enterprises (SOEs) are likely as profitability has declined sharply and lenders are reluctant to roll over maturing debt, but these are not included in fiscal projections.
The SOEs most likely to require injections, such as Denel, South African Express and the South African Broadcasting Corporation, are relatively small and the fiscal impact would be limited. But the document also points to a risk that Eskom, which holds much larger debt of 9.3% of GDP, may require renewed injections if stabilisation measures do not materialise. Gigaba emphasised that a nuclear power programme is not affordable, but the appointment of a new energy minister last week may signal a desire on the part of the government to accelerate a programme.
Proposals to shore up the public finances are being considered by a team of cabinet ministers, with measures to be announced in next year&#8217;s budget. But the fact that no agreement on consolidation measures or even headline targets for revenue increases were included in the MTBPS highlights how disagreements in the ANC have made it difficult to agree on savings measures.
We think that divisions in the ANC will persist beyond the party&#8217;s electoral conference in December, and it is not clear that the political environment will become more conducive to consolidation. The government also seems increasingly concerned that fiscal tightening measures might dent GDP growth and undermine efforts to rein in deficits.

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#Budget2018 needs to address the elephant in the room – State-Owned Enterprises

What S&P is eyeing in SA’s #Budget2018

#Budget2018: Why hiking VAT might not be such a bad idea

S.A budget expectations for 2018

Fitch warns that MTBPS suggests policy shifts to occur much faster than expected

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South Africa Budget Day

A tax, economic review of SA’s 2018 budget

SA Finance Minister Gigaba delivers 2018 budget (Full speech

Minister Rob Davies comments on the 2018 budget speech

SA #Budget2018: A tax on the wealthy, and smartphones

Budget 2018: Financial Woes Continue To Plague S.A’s Profit-lacking SOCs

Budget 2018: Slight Growth in S.A’s GDP Provides Hope for Investments

Budget 2018: S.A’s Economic Risks Still Elevated, Even with Green Shoots In Sight

How SA’s new VAT rate compares to the rest of the world

SA’s #Budget2018 tax changes highlighted: VAT to increase

S.A pre-budget analysis for 2018

Why Gigaba has to do the unpopular thing and increase VAT

#Budget2018 needs to be tougher than what SA has seen in the recent past

#Budget2018 needs to address the elephant in the room – State-Owned Enterprises

What S&P is eyeing in SA’s #Budget2018

#Budget2018: Why hiking VAT might not be such a bad idea

S.A budget expectations for 2018

Fitch warns that MTBPS suggests policy shifts to occur much faster than expected

News Tips

Advertise With Us

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