News in South Africa 22nd February:
1. Tito’s Budget Speech this week:
The week will be dominated by finance minister Tito Mboweni’s Budget 2021 on Wednesday.
While government’s tax income was hit by the pandemic, including bans on cigarette and alcohol sales, there has been a surge in tax from mining companies – which is helping to cushion the blow.
More evidence is emerging that while South Africa is still struggling with crippling government debt, it has seen a remarkable upswing in tax income.
The latest numbers from National Treasury show that in December – despite closed beaches and a lethal second wave of Covid-19 – government’s tax revenue of almost R176.4 billion was significantly higher than the R160.4 billion earned in the same month in 2019.
Then, Treasury confirmed that at the end of January it was sitting on cash of R378 billion. “Everyone (was) shocked,” says Peter Attard Montalto, head of capital markets research at Intellidex, in a new report.
This was R43 billion more than expected.
The cash pile was partly due to an “overissuance” of government bonds in recent months, Montalto says. There has been a strong appetite for South African bonds, which offer solid interest rates compared to others.
But government also saw “an extreme positive revenue shock (from mining and corporate tax) which may partly (though not totally) be a one-off”, he adds.
“Year-to-date (government) revenues are therefore down ‘only’ 5.8% versus the previous fiscal year, whilst January revenue appears to be up an astonishing 39% versus a year before,” says Montalto. This is a remarkable recovery. In May last year, for example, revenue was 30% lower than in the previous year.
2. Electricity price spikes coming:
Even with the 15.63% tariff hike to be implemented on April 1, Eskom considers its electricity tariffs to be far from cost-reflective.
To bring it to cost-reflectivity would have required a tariff jump to 150c/kilowatt hour (kWh) on average, instead of the 134c/kWh applicable from April 1, says Eskom’s general manager Regulations, Hasha Tlhotlhalemaje.
This translates to an increase of 29%.
Eskom hopes to close this gap over the next three years and energy expert Chris Yelland, MD of EE Business Intelligence, expects Eskom to gun for a further 15% increase in the average tariff in 2023.
The thinking at Eskom is that this would give it the step change it says it needs, whereafter increases would be linked to the consumer price index (CPI) .
The introduction of a carbon tax next year and the connection of more independent power producers (IPPs) selling electricity to Eskom at predetermined prices could however result in even bigger increases.
Eskom has been at loggerheads with energy regulator Nersa for years and its view that it has been shortchanged has been vindicated through numerous court victories. The courts have found that Nersa failed to stick to its own methodology and acted irrationally in determining Eskom’s tariffs since 2014.
The corrections following these court rulings have already resulted in the current year’s increase growing from the 5.22% Nersa earlier determined to the 15.63% as announced.
3. Sasol doubled half year profit:
Sasol has doubled its half-year profit to R15.3 billion – despite a 23% fall in the oil price in rand.
The company says this was thanks to strong cash cost and working capital management.
Sasol delivered a good set of results for the six months ended 31 December 2020, our earnings increased by more than 100% to R15,3 billion from R4,5 billion in the prior period. Despite a 23% decrease in the rand/barrel oil price, our adjusted EBITDA decreased by only 6%. This achievement is as a result of a strong cash cost, working capital and capital expenditure performance in response to the challenging environment.
Sasol’s earnings were positively impacted by the following non-cash adjustments:
- Gains of R4,6 billion on the translation of monetary assets and liabilities due to a 15%
strengthening of the closing rand/US dollar exchange rate compared to June 2020;
- Gains of R5,0 billion on the valuation of financial instruments and derivative contracts; and
- R3,3 billion gain on the realisation of the foreign currency translation reserve (FCTR),
mainly on the divestment of 50% interest in the US LCCP Base Chemicals business.
4. Third wave very likely:
Health experts say that it is very likely that South Africa will experience a third wave of Covid-19, following the same trends seen in a bout a dozen other countries that have experienced one.
However, a key factor in how a third wave plays out locally is if we have to deal with another variant of the virus.
The ministerial advisory committee is working on plans to deal with a third wave of Covid-19, while scientists try to figure out what the next variant might look like.
This is according to committee head Prof Salim Abdool Karim, who said: “Based on what we have seen so far with the second wave in SA and third wave in about a dozen countries so far, it is very likely we’ll have a third wave here.”
How a third wave plays out will be “fundamentally dependent on whether we have a new immune-escape variant then. We are busy in the lab here trying to work out what the next variant will look like based on some fascinating experiments that Prof Alex Sigal [director of the KwaZulu-Natal Research Institute for Tuberculosis and HIV] is doing.”
Abdool Karim said there was more than a 50% chance of a new variant, in which case a third wave would be “substantial”.
He added: “If we only see minor mutations without significant immune escape, then the third wave may not be as severe. Our levels of naturally induced immunity from the first and second waves will play a part in this.”
5. Absa and Santam profits drop:
Absa has warned that its headline profit will fall by 55% to 60% for the year to end-December, while Santam’s profit will also be down by between 42% and 52% – due in big part to a spike in business interruption claims in the pandemic.
“This was offset to some extent by a benign claims environment which impacted positively on the motor book and the strong performance of the specialist classes of business, notably engineering and agriculture,” the company said.