News in South Africa 20th February:

1. Rand weakens:

The rand has weakened with the market worried about South Africa’s marked fiscal slippage.

Rand weakens
Photo by Pixabay

In the 2023 Medium-Term Budget Policy Statement (MBTPS), gross debt was projected to peak at 77.7% of GDP in 2025/26, far higher than February 2023’s Budget estimate of 73.6%.

Investec Chief Economist Annabel Bishop said that the nation’s gross debt projections of above 70.0% of GDP by 2031/32 reduce the sustainability of government finances, as an emerging market should have a maximum sustainable debt ratio of 60%

“Expenditure is already 74.2% of the budget for the first three quarters of 2023/24 (and revenue 71.5%), versus expenditure of 70.1% for the same period of 2022/23 (revenue 72.2%) – a marked drop in the projected debt to GDP ratio for this year is unlikely,” Bishop added.

The 2023 Budget also projected gross debt at 72.2% of GDP, which was then increased to 74.7% in the November MTBPS, highlighting the decline in fiscal health.

The budget deficit was also revised from -4.0% of GDP to -4.9% in the MTBPS, showing further fiscal slippage.

“Indeed, markets worry about an even worse outcome, given 2024 is an election year, and the ANC is seeking to cling to power by making election promises already, which will place even greater expenditure pressure on the budget finances,” Bishop said.

The rand is trading at just under R19.00/$ after seeing large increases from the previous weak.

Sourced from BusinessTech

Investec’s GDP forecast for 2024 of 1.0% aligns with that seen in the MTBPS, but the MTBPS’s prediction of 1.6% is likely too strong, which could lift the gross loan debt projection to GDP for 2025/26 higher, adding even further fiscal slippage.  

Financial markets do not respond positively to increased borrowing, especially when expenditure does not match the decline in revenue, which has been the case for South Africa over several years, causing bond yields to bounce up and credit ratings to plunge.   

Markets are also concerned about increased populism creeping into the Budget, as polls show that the ANC may lose its national majority in the upcoming elections.

Bishop said the ANC prefers the more fiscally astute IFP as a coalition partner, expecting it to get 46% of the vote. However, more recent polls show a greater loss in support for the ANC, worrying markets.

In addition, the Budget is expected to show plans to tap into the nation’s Gold and Foreign Exchange Contingency Reserves Account (GFECRA)

There are worries about what the funds would be used for, such as higher public wages instead of a more sensible reduction in debt.

“Using the GFECRA to reduce debt (at a maximum of less than 10%) would be a temporary measure in a weak economy, with debt likely to just creep up again, with South Africa’s debt of R5.2trillion and the GFECRA cannot be quickly replenished,” Bishop said.

Fears also surround the expansion of the Social Relief and Distress Grant into a Basic Income Grant and increasing its monthly allowance from R350, potential Transnet and Eskom bailouts and under-pressure tax collections.

2. E-tolls scrapped:

The formal process to switch off and delink e-tolls on the Gauteng Freeway Improvement Project (GFIP) will begin on 31 March 2024, Gauteng Premier Panyaza Lesufi announced on Wednesday night.

Delivering his Gauteng State of the Province Address (Sopa), Lesufi said e-tolls will then “be history in our province”.

Lesufi did not provide any details on whether motorists who had paid their e-tolls would be refunded, as he previously indicated, or where Gauteng would obtain the finances to pay for the province’s portion of the e-toll debt or for the future maintenance of the GFIP network.

He confirmed on Monday night that meetings were held with all affected parties, including Minister of Finance Enoch Godongwana and Transport Minister Sindisiwe Chikunga, and “all of us have now reached an agreement that by 31 March 2024 the formal process to switch off and delink e-tolls will begin and e-tolls will be history in our province”.

That meeting is believed to have taken place on 26 January 2024 and reached agreement on:

  • Issues related to the user-pay-principle quantum of GFIP debt;
  • The quantum of sunken capital expenditure costs;
  • The capital expenditure obligations of the Gauteng province;
  • The yearly maintenance costs of the GFIP 1;
  • The repurposing of the e-toll gantries;
  • The repayment of SA National Roads Agency (Sanral) GFIP debt; and
  • The future funding of GFIP 2 and 3.

Lesufi said Godongwana “will elaborate on this subject” without indicating when, but presumably in his budget speech on Wednesday.

The discussions and negotiations over the scrapping of the GFIP e-tolls follow Godongwana stating in his Medium-Term Budget Policy Statement (MTBPS) speech in October 2022 that to resolve the funding impasse over the GFIP e-toll scheme, the Gauteng Provincial Government had agreed to contribute 30% to settling Sanral’s GFIP debt and interest obligations, while national government covers 70%.

Lesufi subsequently confirmed in November 2022 that the total amount to be paid by the provincial government was R12.9 billion – 30% of R43 billion – using different revenue streams in the form of a hybrid model.

Godongwana said at the time Gauteng will also cover the costs of maintaining the 201km and associated interchanges of the roads while any additional investment in the roads would be funded through either the existing electronic toll infrastructure or new toll plazas, or any other revenue source within their area of responsibility.

In the MTBPS, R23.7 billion was allocated to Sanral to pay off government-guaranteed debt, but this allocation was conditional on a solution to Phase 1 of the GFIP.

In an exclusive interview with Moneyweb in October last year, Lesufi denied saying that motorists who had paid their e-tolls would be refunded.

702 Eyewitness News reported in January this year that Lesufi had confirmed that almost R6.9 billion will be refunded to motorists who have been paying for e-tolls on the GFIP.

3. NHI fund deficit:

Implementing the National Health Insurance (NHI) Bill would require over R200 billion in funding on top of the Department of Health’s annual budget. It translates into a tax of R1,565 per month for every worker in South Africa.

This is feedback from FTI Consulting, which outlined the NHI’s potential cost and how it could be funded. 

As South Africans wait for President Cyril Ramaphosa to sign the NHI Bill into law, finance experts have warned that the scheme is not economically viable as it requires substantial funding sources.

“While everybody agrees that the country’s healthcare system requires reform and that this should provide access to universal health coverage, the NHI Bill, in its current form, is not economically viable for South Africa,” FTI said.

“The Department of Health, in its 2017 White Paper on the NHI and the NHI Bill, has flagged sources such as VAT, personal income tax and payroll taxes for raising additional funding.”

A presentation by the Department of Health indicated that in addition to public funds that can be allocated to an NHI Fund, an additional R200 billion will be raised. 

FTI clarified that the additional tax amount indicated by the government is not the total cost of the NHI, as it will probably need much more to implement fully. 

For context, R200 billion equals –

  • 12.8% of South Africa’s current gross tax revenue
  • 36.1% of personal income tax
  • 62.4% of corporate income tax
  • 51.2% of VAT

FTI pointed out that any funding must be sourced from taxes. The government has already confirmed that taxpayers would be footing the bill for the scheme.

However, any tax changes would require the National Treasury to propose a Money Bill. The passing of the NHI Bill, and even signing it into law, does not change any taxes.

NHI Deputy Director General Nicholas Crisp explained the government’s plan to fund the new health financing system.

“When we come to the contributions made in the private sector, the only way to move that money into the NHI fund is through taxes,” he said.

“Whether that is through VAT or other taxes is a matter for the National Treasury and the money bill, which will come later.”

Crisp added that the NHI Bill creates alternative mechanisms that do not currently exist, like a payroll tax.

It echoes the view of Health Minister Joe Phaahla, who said taxpayers would be footing the bill for NHI.

To raise R200 billion in the current fiscally constrained environment – and assuming that the number of taxpayers and their spending remains constant – will require a

  • VAT increase from 15% to 21.5%
  • Personal income tax rates increase by 31% across the board
  • A payroll tax on those employed in the formal, non-agricultural sector of an estimated R1,565 per month

“These substantial tax increases will need to be implemented in an already tough economic environment,” the group said.

Considering South Africa’s tough economic conditions, these additional taxes will cause significant damage and hamper growth.

4. Fossil fuel reliance:

South Africa’s Presidential Climate Commission said the energy ministry has an inadequate plan to tackle the country’s power supply crisis, and its lack of attention to air quality and climate change puts it in conflict with the law and international agreements.

The so-called Integrated Resource Plan, developed by the energy ministry, is currently open for public comments, and amendments may be made before it’s finalized in May.

The scathing criticism by the body established to advise President Cyril Ramaphosa on climate issues highlights the schism in government caused by a reliance on coal for power generation.

Energy Minister Gwede Mantashe has expressed a reluctance to move away from the use of the world’s dirtiest fossil fuel, saying it’s necessary for electricity supply and employment, while the presidential climate body has been advocating for a green transition.

Tensions around the dispute have been deepened by a power supply crisis that’s crippling the economy as the coal-fired power plants that supply more than 80% of South Africa’s electricity repeatedly break down.

“The IRP does not address its primary energy security objective and does not provide any analysis to show how this might be achieved in the short term,” the commission said in a presentation released after a Feb. 16 meeting.

“The IRP does not effectively address the issues of climate change and air quality.”

South Africa is the world’s 15th-biggest producer of climate-warming greenhouse gases and has one of the world’s most carbon-intensive economies.

Air pollution to the east and south of its biggest city, Johannesburg, is among the world’s worst due to a concentration of coal-fired power plants, petrochemical complexes and other heavy industries.

The criticism from the government body adds to concern from renewable energy advocates that a plan to build more than 100 gigawatts of power generation capacity by 2050 from a variety of sources isn’t ambitious enough.

The master plan also does little to address access to energy concerns, doesn’t propose using the cheapest power-generation technologies and could heighten inequality, the climate commission said.

“At the very least, a scenario to 2030 that more aggressively addresses load shedding is needed,” the commission said, using a local term for power cuts.

“A detailed review of air quality and its impacts on technology choices is needed. This is a legal requirement.”

5. WC combats loadshedding:

Winde, who delivered his last State of the Province Address (SOPA) of his term to a packed community hall in Paarl on Monday night, said that at stage four, load shedding costs the Western Cape up to R43 million per day.

The premier, while being constantly heckled by opposition members, said the Western Cape was on its way to becoming the first province to be free of load shedding.

“I also want to say that in this province, between our province and our municipalities, we have budgeted R7 billion for the next three years to make the Western Cape energy resilient, and in that, it’s about partnership with the private sector.”

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

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