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SA’s economy on a knife-edge: A good balancing act

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The start of 2016 has seen a nose-dive in global markets with equity indices in Europe and Japan falling 10% in the first two weeks of January. As China makes its transition to a slower-growing, consumer-oriented economy, its demand for everything from oil and base metals to industrial materials has slipped and caused the prices of those commodities to plunge. It seems as though China’s ‘sneeze’ has given oil and commodity markets pneumonia. Brent crude fell to an 11 year record low of under $30 a barrel in the second week of January 2016. Morgan Stanley investment bank predicts it will slide even below $20 a barrel during the course of the year.

Locally, stock markets are down and we have seen the rand falling 25 percent against the dollar in 2015. Some analysts are even predicting that the rand could drop to as low as R19 to the dollar come this year December. The currency remains a key source of risk for inflation in South Africa.

The weakening rand, electricity tariff increases, interest rate hikes, political uncertainty and the impact of the drought (low rainfall combined with record-high temperatures) on food prices have put added strain on the economy. To make matters worse, National Treasury needs to fund a growing shortfall for tertiary education since President Zuma introduced 0% increase in tuition fees this year.

Treasury’s growth forecast of 1.7% for 2016 seems too optimistic and will most likely be revised in the February Budget by Minister Pravin Gordhan.

Budget Speech

Finance Minister Pravin Gordhan’s Budget speech on February 24 will be watched with keen interest as the Minister will have to pull off a very ‘good balancing’ act. Much depends also on the measure to which the minister can convince the public to maintain trust on the structural economy and the economic policy direction taken by Government.

South Africa can ill afford a credit ratings downgrade to junk and a possible recession in an important election (municipal) year.

Given the country’s ever-widening budget deficit, a poor economic growth outlook and two downgrades in South Africa’s credit rating, Gordhan will have little choice but to raise sin taxes on alcohol and tobacco products, while a further increase in the fuel levy and the Road Accident Fund is also imminent.

According to the Davis Tax Commission, value-added tax (VAT) would be the least disruptive to employment and economic growth. Thus a one percentage point increase in VAT is on the cards and has the potential to raise more revenue than other tax vehicles. Tax professionals are divided on the issue of an immediate vat hike as there is huge pressure on Government to deliver in an election year.

However, the Minister should leave the rates of corporate tax as they are, but it will be hoped that he gives guidance on the issue of a foreign exchange amnesty.

In the light of future developments on the exchange of information, many representations have been made to the current and previous Minister for an extension to the foreign exchange amnesty and one hopes that significant guidance will be heard in this regard at the time of the Budget speech. According to Paul Gering, partner at PKF, back in 2002/2003, 43 000 foreign exchange amnesty applications were received and R65 billion foreign assets regularised. The proceeds of another foreign exchange amnesty programme could be used to fund the development of small businesses in South Africa.

Furthermore, national treasury could generate additional revenue for state coffers through the introduction of a wealth tax, which is essentially a super tax (around 42-43%) on the highest income earners and a possible increase of capital gains tax on individuals. However one needs to caution that any suggestions of a ‘super tax’ must be accompanied by a serious commitment from Government to curb wasteful spending.

Brighter side

On a positive note our country has a well capitalised banking system, excellent auditing and reporting standards, abundant natural resources, well developed regulatory systems, and an established manufacturing base.

South Africa has a diverse economy, with key sectors roughly contributing to gross domestic product (GDP)* as follows:

  • Finance, real estate and business services: 20.7%
  • Government services: 17.6%
  • Wholesale, retail and motor trade, catering and accommodation: 14.6%
  • Manufacturing: 13.3%
  • Mining: 10%

* Note: Percentages based on third quarter 2015 GDP data from Statistics SA

A sector that has continued to show promise is real estate, finance and business services which contributes over 20% to GDP.

According to key players in the property market, the market has shown marked resilience regardless of the bleak economic outlook and the fact that interest rates have been nudging higher since 2014. This could be linked to the fact that there is a great demand for residential homes in established suburbs as the population rapidly increases.

Speaking at an issue briefing at the World Economic Forum (WEF) Annual Meeting in Switzerland from 20-23 January 2016, Minister Gordhan stressed on South Africa’s lead in renewable energy.

It is projected that the energy contribution which is one of the best in the world should grow to approximately 7 000 gigawatt hours a year with the first 47 renewable energy independent power producers fully operational and producing at full capacity this year. In 2011, the Government entered into the Green Economic Accord, which aims to create 300 000 jobs in the next 10 years through investment in the green economy.

Furthermore Gordhan emphasised creating co-investment opportunities for business and government.

“One of the issues that we are looking at together with business is how we can enable business to actually get involved in more tradeables, more effective winning of market share, particularly in sub-Saharan Africa because there’s a lot of space to be gained in the construction and generally, in the services sector as well. Focusing in certain parts of the real economy and supporting that, particularly through investment in infrastructure and undertaking some tough reforms, particularly in the education and skills development area and the area of delivery of infrastructure in terms of creating greater efficiency and better spending of public funds,’’ Gordhan told the WEF issue briefing.

In the lead up to the much anticipated Budget Speech on February 24 by the Minister of Finance, Pravin Gordhan, MANCOSA will be hosting a post-budget breakfast on Thursday, 25 February 2016. A discussion by a panel of finance experts will debate, deliberate and discuss the outcomes of the budget speech and its impact on the economy. The annual MANCOSA Post Budget Speech is a sought after event in KZN.

By Ridwaan Asmal (Academic-Finance)

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