News in South Africa 13th February:

1. SA’s biggest risks:

The biggest risks to South Africa’s 2024 economic outlook may come from insufficient power supply, strains on debt sustainability and the erosion of state legitimacy ahead of elections, according to Allianz.

SA's biggest risks
Photo by Alex Green

The global financial services giant estimates that South Africa’s economy will expand by 1.4% this year from the 0.7% forecast for 2023, but a lack of reliable electricity supply poses the heaviest drag on growth. 

Africa’s most industrialized nation endures almost daily power cuts because years of neglect, corruption and mismanagement have left state-run electricity utility Eskom unable to keep up with demand. 

Electricity outages prevent businesses, industry and households from realizing their potential and “it is improbable that sufficient capacity will materialize in the next 12 months,” Allianz said in its maiden Country Risk Atlas report.

Debt sustainability:

A worsening debt trajectory is another factor that could weigh on the country’s economic outlook, Allianz said in its report, which assesses non-payment risks in 84 major economies.

“Due to a considerable short-term absorption of revenues to repay interest on debt and an increase in sovereign bond yields, South Africa ranks in the worst quintile in our public debt sustainability risk assessment as of end-2023,” Allianz said.

The situation could be further exacerbated by increased demands on public finances for social programs and idiosyncrasies among state-owned companies ahead of elections, according to the report.

Government departments and state-owned entities have been advocating for more spending even as tax revenues have undershot forecasts.

Their calls have grown louder as opinion polls show the ruling African National Congress may lose its majority for the first time since taking power in 1994 in elections that need to be held by August.

President Cyril Ramaphosa has pledged to extend and improve a popular 350 rand ($18.42) monthly social grant for the unemployed introduced during the coronavirus pandemic despite it not being budgeted for beyond March 2025.

Finance Minister Enoch Godongwana will likely provide more details when he tables the annual budget on Feb. 21.

State legitimacy:

The erosion of the state’s credibility is a further risk to the country’s economic outlook, Allianz said. 

“Worsening disputes among political elites and the resulting increase in violent uprisings and insurgencies further weigh on state legitimacy, the capability of the ruling ANC party to defuse dissent and the predictability and effectiveness of government action,” it said. 

In July 2021, law enforcement agencies struggled to bring under control a week of rioting and looting, which coincided with the arrest of ex-President Jacob Zuma on contempt charges and was fueled by widespread anger over poverty and coronavirus curbs.

2. Tax hikes for the wealthy:

The South African government desperately needs more revenue, with potential tax hikes on the cards for the wealthy.

During the 2023 Medium Term Budget Policy Statement (MTBPS), Minister of Finance Enoch Godongwana outlined several cost-cutting measures expected to be integrated into the 2024 Budget, which will take place next week.

Forecasts expect a widening budget deficit for the country, exceeding the 6% estimate provided in the November MTBPS.

The minister also noted government expenditure has consistently outstripped tax revenue since the 2008 economic crisis, with the government now forced to borrow to fund essential services and repay existing debt risks that are entrenching the country in a perpetual debt spiral.

Phillip Joubert, Manager at the SAIPA Centre of Tax Excellence, said that financing infrastructure development, the National Health Insurance (NHI) and the Basic Income Grant remain massive challenges.

These initiatives and the under-resourced sectors of education, healthcare and social services need considerable funding.

“Without the government’s commitment to fiscal responsibility and spending cuts in other areas, increasing revenue through taxation remains the sole avenue for funding these essential projects,” Joubert said.

New taxes

That said, several taxes are expected to remain stable in the upcoming budget, such as Value Added Tax (VAT).

Given VAT’s regressive nature disproportionately affecting the less wealthy, any increase would also require other compensatory measures to mitigate its impact on the poor, such as enhancing the zero-rating of staple food items.

The government may, however, consider revising taxes targeted at wealthier individuals, Joubert said.

These could include:

  • Donations tax;
  • Capital gains tax (CGT);
  • Transfer duties; and
  • Dividends withholding tax.

“For instance, an increase in the capital gains tax inclusion rate for individuals from 40% to 50% could achieve some of the government’s fiscal objectives.

“Similar adjustments could be applied to estate duty and donations tax rates.”

There could also be further pain at the pumps for the consumers, as the government may increase the general fuel levy, which has remained unchanged for the last two years amid high fuel prices, as it is an easy source of revenue.

Joubert also expects increased excise duties on tobacco, nicotine products, and alcoholic beverages.

3. Lack of confidence hampers investment:

A lack of confidence by the private sector has been blamed for the sharp drop in fixed investment activity, with the value of new projects announced in 2023 slumping by almost 29% (to R184.8 billion from R259.9 billion in 2022) – and by 53% since 2021, when it came in at R392.7 billion.

The 2023 Nedbank Capital Expenditure Project Listing report released on Tuesday attributes this to the slowdown in new projects announced by the private sector and public corporations.

Projects announced by the private sector fell by 147% to R56.1 billion from R203.3 billion in 2022, and in 2023 accounted for only 30% of the total value of projects announced.

Capital expenditure projects announced by public corporations or state-owned enterprises (SOEs) slumped for the second consecutive year by 22% to R27.1 billion from R34.9 billion in 2022 and 88.6% compared to R236.9 billion in 2021.

Private sector ‘forced to look after itself’

Rowan Goeller, an analyst at Chronux Research, said the slump in the value of private sector projects announced indicates a lack of confidence in the economy, which does not bode well for economic growth and employment creation.

Goeller added that 2023 was a year after the riots in KwaZulu-Natal and Gauteng and the worst load-shedding year ever.

However, he said the project listing numbers are always “quite funny” in that they are projects announced and not projects that have actually been constructed.

“A fair amount of them don’t even happen, especially those announced by government.”

Goeller also said he believes many of the projects announced are to allow companies to remain sustainable rather than them investing in new capacity.

He said the private sector has now been forced to look after itself in terms of infrastructure provision where government has failed. He pointed to the meaningful number of companies investing in their own power, particularly solar energy, because of load shedding.

“Load shedding distracts them, and they cannot really invest in growth because if they are worried about power, they need to make a plan for their existing business.

“It [the investment] possibly provides a base from which they can grow into the future, but in general, corporate South Africa is in survival mode and trying to remain sustainable without any thought of growth because the economy is not growing and consumers are not spending,” he said.

Goeller added that there isn’t any major capital expenditure going on with SOEs because they are getting bailouts “and can’t spend on anything”.

“Sanral will be the one shining light and maybe account for more than half or about R20 billion of that expenditure,” he said.

4. Sabotage at Eskom:

Electricity Minister Kgosientso Ramokgopa says that given the size of Eskom, some would like to see their hard work undone.

However, the vast majority of employees at the ailing power utility are reputable, honest, and trustworthy.

Ramokgopa was responding to ANC Secretary General Fikile Mablula’s claims of sabotage, for the latest high stages of blackouts.

Electricity Minister Kgosientsho Ramokgopa said there have recently been incidences at Eskom that require further investigation and did not rule out sabotage as a reason for higher load-shedding stages.

When asked to clarify whether the stage 5 and 6 load-shedding the country is currently experiencing had nothing to do with sabotage, the minister said, “I did not make an absolute statement”.

“I have stated to you what we know, and I just said that there is one of two incidences that require further investigation,” he said.

Ramokgopa refused to elaborate on the incidents and the power stations where they took place, saying, “We think there is something they need to be answering for”.

5. R160b investment in Transnet:

Following an internal diagnostic review by Transnet at the end of 2023, there are plans to invest R160 billion to address the infrastructure woes plaguing South Africa’s port and rail industry.

On 23 November 2023, President Cyril Ramaphosa addressed the concerns surrounding the ailing state-owned logistics company Transnet – which was facing severe bottlenecks and delays at its ports across the county at the time.

The president admitted there had been a lack of maintenance of Transnet infrastructure and that the state-owned entity had failed to maintain a close relationship with its customers.

Between 23 and 30 November 2023, the Port of Durban reached a crisis point as equipment failures and bad weather led to a backlog of dozens of vessels and tens of thousands of containers.

The South African Association of Freight Forwarders (SAAFF) said that delays at ports have had direct costs to the South African economy of R98 million ($5.2 million) a day. At the same time, the movement of around R7 billion worth of goods had been impeded.

In January 2024, Transnet Port Terminals said a significant headway had been made to reduce the vessel backlog at the Port of Durban.

Despite this, experts – including Old Mutual Group chief economist Johann Els – noted that improvements in Transnet’s port operations were welcomed, but the significant backlogs of investments in rail and port operations meant that Transnet on its own would not be able to develop crucial transport infrastructure fast enough to support the economy.

In response to the need to address the ailing ports, Ramaphosa was optimistic that a positive change would occur following Transnet’s internal diagnostic process.

“The plans that we have for this precinct are plans of high quality, and there’s going to be a lot of investment – up to R160 billion,” he said.

Following this statement, the South African Government News Agency (SA News) provided an update on the government’s infrastructure plans and projects – including investment into Transnet.

According to SA News, the investment of R160 billion will be spent on addressing South Africa’s slow turnaround times at its ports, particularly in Durban.

“Following an internal diagnostic review by Transnet, there are plans to invest R160 billion to address the infrastructure.,” it said.

It includes procuring 16 gantry cranes and the acquisition of four ship-to-shore cranes to address slow turnaround times affecting the docking and offloading of containers at the port.

Transnet also plans to deepen and lengthen two berths at its Durban Container Terminal Pier 2, which handles about 65% of the country’s containerised cargo, as part of efforts to ease backlogs.

All information sourced from articles posted by: DailyInvestor, BusinessTech, Moneyweb, and eNCA.

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