News in South Africa 16th February:
1. Bad news for taxpayers:
The Finance Minister will likely announce an increase in tax rates in the Budget Speech later this month as the government’s revenue collections continue to disappoint, leaving a gap of R15 billion to be filled.
This is feedback from financial services firm PwC, which outlined in its Budget Predictions 2024 that the National Treasury will be forced to raise taxes.
Finance Minister Enoch Godongwana signalled in November that he would announce new tax measures to raise an additional R15 billion in this year’s budget.
PwC said revenue collection for the current fiscal year has underperformed the minister’s estimates from last year’s budget.
National Treasury forecast revenue of R1.78 trillion in last year’s budget, expecting growth of 6% from the previous financial year.
This was based upon a sharp decline in corporate tax collections as commodity prices would fall throughout 2023, reducing mining companies’ profits.
However, the decline was steeper than expected, and load-shedding was more severe. This resulted in the National Treasury revising its forecasted revenue down by R56 billion in the Medium-Term Budget Policy Statement (MTBPS).
PwC expects revenue collections to be in line with the estimates in the MTBPS.
In the MTBPS, the National Treasury estimated tax revenues for the coming financial year ending in 2025 to be R1.85 trillion, which is R54 billion less than forecasted in last year’s budget.
This forecast includes an unspecified proposed increase in taxes amounting to R15 billion, the details of which will be announced in the Budget 2024.
National Treasury has said tax increases would be a last resort. It hoped that revenue collections for the current fiscal year exceed expectations and, thus, the medium-term outlook improves.
“However, we do not expect this to occur and that the government will proceed with the tax increases announced in the MTBPS 2023,” PwC said.
To raise an additional R15 billion in tax revenue, the government must raise the corporate income tax rate by 1.4% to 28.4%, personal income tax by 0.5% across all bands, or increase VAT by 0.5% to 15.5%.
Of these potential increases, PwC expects the National Treasury to raise VAT as there is no scope to raise corporate or personal income tax rates.
Personal income tax has largely been exhausted, and corporate taxes have been a “volatile” and “unreliable” revenue source in recent years.
That’s partly due to mining companies, which have contributed to previous windfalls, facing a knock to their profits from lower commodity prices, power cuts and logistics snarl-ups.
The key question is whether the government will be brave enough to raise the VAT rate in an election year.
2. Fuel prices to soar:
Economists from the Bureau for Economic Research (BER) say the volatile global oil price and the weaker rand against the dollar will likely push fuel prices higher in March – which is bad news for inflation.
In the group’s weekly review, it noted that the oil price remains volatile as tension in the Middle East continues to build, with no end is sight for the ongoing conflict in the region.
“Israeli Prime Minister Benjamin Netanyahu once again said that a permanent ceasefire is not on the table and that the country would push for a total victory over Hamas.
“At the same time, there are increased worries about the clash between Hizbollah (Lebanon) and Israel turning into a full-blown war after Israel carried out numerous airstrikes in South Lebanon (in retaliation for a suspected Hizbollah attack on Israel),” it said.
While steady US oil production has so far prevented the oil price from blowing out despite increased geopolitical unrest in the Middle East, crude is still trading higher than at the start of the year.
“Indeed, with a so far higher Brent crude oil price and a weaker rand exchange rate in February (relative to January), fuel prices could rise once more next month, keeping pressure on inflation,” the BER said.
This echoes analysis from Investec chief economist, Annabel Bishop, who noted earlier this week that both the rand and global oil prices are on shaky ground.
While the rand is trading weaker because of a mix of local and global issues – local being tensions and anxieties ahead of the 2024 elections, and global being the sentiment around higher interest rates sticking around for longer – oil prices are also tied up in a confluence of macroeconomic matters.
The aforementioned tensions in the Middle East are a big factor – but so is the sentiment around US interest rates, overall demand from China, and moves by OPEC+ nations.
Reporter”s analysis shows that both petrol and diesel are looking at a sharp hike in March, with the former showing an under-recovery (thus eventual increase) of around R1.30 per litre and the latter lining up a hike of between R1.40 and R1.50 per litre.
3. Commercial property woes:
Earnings growth in South Africa’s commercial real estate industry will still be under pressure in 2024 due to high finance costs unless the central bank starts to aggressively cut interest rates, executives of the country’s top two property groups said on Thursday.
Commercial real estate was one of the hardest hit by the pandemic, when government-imposed lockdowns shut offices and limited shopping trips, resulting in some tenants deferring rent, hitting income and profits for the industry.
While share prices have recovered, property companies are facing a double whammy of office oversupply and sharply higher funding costs driven by higher interest rates.
Estienne de Klerk, CEO of Growthpoint Properties South Africa business told Reuters on the sidelines of a property conference that property fundamentals certainly have stabilised and seem to be improving, however “it doesn’t mean that it isn’t tough out there.”
“In terms of distributions, I do think that this year and potentially still next year the industry will still be hampered by interest rates coming through the debt book as we roll out of interest rate hedges into more expensive interest rate hedges,” he said.
Distributable income per share (DIPS)- one of the primary measures of underlying financial performance in the listed property sector – of some property companies like the country’s biggest real estate group Growthpoint and no.2 Redefine Properties have either marginally risen or decreased, mainly hit by high rates.
South Africa’s Reserve Bank paused its interest rate hiking cycle in July for the first time since November 2021. Economists expect rate cuts to restart as early as May this year.
A high interest rate environment also lowers the asset value of properties.
In a rising interest rate environment, 77.7% of Growthpoint’s debt book is hedged, while domestic finance costs, including finance costs and income received on interest rate swaps, increased by R215 million ($11.34 million) during its financial year ended June 30.
Redefine is also hedged at 77.1% of total group debt. Its cost of debt ticked up by 110 basis points to 7.1% in the year ended August 31 from 6% in 2022 due to higher rates.
Leon Kok, the Chief Operating Officer at Redefine also told Reuters at the sideline of the conference that “from a property performance point of view there is definitely signs that it has bottomed out,” although power cuts, municipal costs, water scarcity and security remain a key risk.
4. Inflation risk:
Persistent, weak South African economic growth and difficulty in sticking to spending targets may disrupt the return to lower inflation, showing the need for consistency in fiscal policy, the central bank’s chief economist said.
Policymakers prefer to anchor inflation expectations at the 4.5% midpoint of the target range, a level it was last at in 2021 and is only expected to settle there next year, according to Reserve Bank projections.
“Staying at this level will require long-term inflation expectations once again returning to the 4.5% level,” Chris Loewald, head of economic research at the South African Reserve Bank, wrote in a chapter of a newly published book titled Monetary Policy Responses to the Post-Pandemic Inflation.
“Macroeconomic policy consistency has become more important as a continued path of fiscal slippage and weak underlying growth risks derailing the envisioned disinflation.”
Loewald’s comments underpin South Africa’s frail public finances and weak expansion. Africa’s most industrialized nation has consistently missed its debt targets, and the annual average growth rate has been less than 1% in the past ten years.
Finance Minister Enoch Godongwana will deliver the national budget on Feb. 21 where he will have an opportunity to show the country’s commitment to rein in liabilities as demands on public finances increase ahead of elections due to be held this year.
The vote is expected to be the tightest since the ruling African National Congress took power in 1994. Polls suggest it may lose its majority for the first time.
The Reserve Bank has repeatedly highlighted fiscal risks as a threat to its job to quell inflation, warning that they could keep borrowing costs higher for longer.
At its last meeting, the monetary policy committee voted to keep the benchmark interest rate at a 2009 high of 8.25%. Governor Lesetja Kganyago said there was no discernible evidence that inflation is cooling to the midpoint of its 3% to 6% target band.
“For now, the main priority is to get inflation back to target,” Loewald said. “The price formation process would also benefit from the removal of longstanding structural impediments, such as product and labour-market rigidities, poor education outcomes, inefficient infrastructure, weak governance, and high policy uncertainty.”
These measures would aid job growth, boost investment and bring economic growth back toward emerging-market averages.
Rolling power cuts, clogged ports, inefficient railways that reflect inadequate investment, and poor management have handicapped the economy for years.
“The successful implementation of reforms will require a gradual but sustained approach and will depend on having strong and independent institutions,” Loewald said.
5. SOE bailout outcry:
A Treasury presentation to parliament this week highlighted the woeful financial records of South Africa’s state-owned enterprises (SOEs) and their cost to taxpayers.
In the past three years, the government has bailed out six ailing SOEs to the tune of R281 billion – not counting an additional R24 billion for the SA National Roads Agency.
New type of bailout:
The Bureau for Economic Research (BER) will also be looking for bailouts for Transnet during the Budget, noting that the group still needs R100 billion for corridor investment.
“However, unlike straightforward bailouts, as we have seen with other SOEs in the past, it seems like the government is more open to private sector participation in the logistics space,” the BER said.
“It would be welcomed if we saw a mechanism that brings in private partners and development finance institutions.”
“Beyond the logistics space, the Budget is likely to tote infrastructure spending in general.”
All information sourced from articles posted by: DailyInvestor, BusinessTech, Moneyweb, and Business Day.
