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Credit agencies to keep a keen eye on Nene

Monday, 19 October 2015   (0 Comments)
Posted by: Author: Wiseman Khuzwayo
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Author: Wiseman Khuzwayo (IOL)

Finance Minister Nhlanhla Nene will cut his growth estimates in line with other forecasts when he delivers his mini budget on Wednesday, which will be watched with a keen eye by credit rating agencies.

First National Bank (FNB) economists Alex Smith and Mamello Matikinca said on Friday that the medium-term budget policy statement (MTBPS) would be more important than usual because South Africa’s sovereign credit rating had come under pressure in recent years, placing a keen focus on the Treasury and its ability to meet budget targets.

In his February 25 Budget, Nene set a gross domestic product (GDP) growth forecast of 2 percent in 2015 and 2.4 percent in 2016.

Growth estimates

Since February the economy has deteriorated, which will compound South Africa’s most entrenched problem of unemployment, which official figures put at 25 percent but could be as high as 40 percent.

In the past week, the International Monetary Fund (IMF) has slashed South Africa’s growth estimates. It reduced its GDP outlook to 1.4 percent from 2 percent for the year, while it reduced its forecast to 1.3 percent from 2.1 percent for 2016. The Reserve Bank’s estimate for this year is 1.5 percent.

Smith and Matikinca said this growth underperformance pointed to a heightened risk that tax receipts would come in lower than expected.

They said, nevertheless, they believed the Treasury was committed to meeting its budget deficit targets. "Therefore, if a tax undershoot is expected by the Treasury, we think it will announce measures to reduce spending and/or raise taxes. While the specific measures will probably be announced in next year’s main Budget, we can expect them to be alluded to in the MTBPS.”

Sanisha Packirisamy, an economist at MMI Holdings, said although traditionally the MTBPS had not outlined much in the way of tax reform or additional tax measures, this time the government could hint at ways to improve revenue collection, while citing reports published by the Davis Tax Committee on estate duties, VAT and mining duties.

She said although a VAT increase could boost tax revenues in the most efficient way, a deterioration in the outlook for domestic consumers suggested a regressive VAT increase (which disproportionately hit the poor), was unlikely to be proposed in the upcoming budget.


"This could yet be considered further down the line, probably in conjunction with a further rise in the top marginal tax brackets and coupled with an extension in the range of exempted goods, particularly if financing is required for the implementation of the National Health Insurance plan.”

Nazmeera Moola, an economist and strategist at Investec Asset Management, said it was imperative that the Treasury used the MTBPS to reassure the markets of its commitment to fiscal sustainability. "If South Africa is to retain its investment grade rating, the Treasury has to make its budgetary discipline clear. However, this is not without its challenges.”

She said the Treasury would have to downgrade the growth forecasts yet again. "This raises real risks for revenue projections, which are based on higher GDP forecasts. Given weak corporate taxes and… domestic economy, personal income tax growth is likely to be more muted than expected. This means the Treasury will have to demonstrate where they are going to get extra revenue from.”

Moola said it was certain that rating agencies would keep an eye on the tone of the MTBPS. "While Moody’s and S&P may be on hold… the only thing that could stave of a downgrade from Fitch in December (to one notch above non-investment grade) is a budget that is more focused on reigning in debt to GDP.”

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