News in South Africa 28th August:

1. Investors on edge:

Capital markets are on edge over South Africa’s deteriorating fiscal outlook, say economists at the Bureau for Economic Research (BER), with government data on revenue expenditure out later this week likely to be of particular interest to investors.

Investors on edge
Photo by AlphaTradeZone

National Treasury is due to release its main budget data for July on Wednesday (30 August), with finance group Absa expecting a main budget deficit of R123.7 billion to be announced.

Market consensus on the deficit is around R123 billion, versus a bigger R130 billion deficit in July 2022.

According to Absa, a print in line with this forecast would leave the 2023/34 fiscal year-to-date main budget deficit at R171 billion, compared with the deficit of R118 billion over the same period in 2022/23, pointing to a massive deterioration of South Africa’s financial position.

This comes as the country faces the other part of its “twin deficit”, which will also come into focus this week when the South African Revenue Service (SARS) publishes the July merchandise trade data on Thursday (31 August), Absa said.

The final print for this figure is varied, with Absa forecasting a small surplus of R2.7 billion versus a R3.5 deficit in June, due to “strong seasonal factors”.

Market consensus is for a smaller R800 million surplus; however, economists at Nedbank anticipate a trade deficit to remain.

“We forecast a narrower trade deficit of around R1.4 billion in July from R3.5 billion in June as exports rebounded faster than imports over the month following seasonal drops in June,” Nedbank said.

“Overall, export performance remained contained by subdued global demand, low commodity prices, and persistent power shortages. At the same time, the burning of goods trucks on some of the major routes also likely impacted shipments.”

According to economist Dawie Roodt, South Africa’s deficits are lining the country up for a world of hurt.

Roodt said that South Africa’s fiscal deficit for this year would exceed the budget set by finance minister Enoch Godongwana by some margin and that the country will soon find itself in a significant debt trap.

“South Africa’s fiscal deficit for 2023 is set to be between 6% and 6.5% of gross domestic product (GDP), much higher than the minister’s expected 4%,” Roodt said.

Roodt expects the country’s debt to increase to 75% of GDP by the end of the year and reach 80% by the end of 2024.

2. Too soon to celebrate the drop in inflation:

Headlines trumpeted the decrease in the inflation rate last week, mostly saying that people can breathe a sigh of relief that increases in food and transport costs are eventually tapering off – but anybody doing the monthly or weekly shopping might disagree. Food in particular is still very expensive.

More than one commentator pointed out that the decline in the consumer price index (CPI) to 4.7% in July 2023 is more the result of the “base effect” of high prices in July 2022, rather than food prices easing.

South Africa’s central bank governor has warned that there are still risks to inflation, even as he acknowledged that the rate has come down significantly.

“We are focused on the outlook for the South African economy for both growth and inflation. The job is not yet done,” Lesetja Kganyago told Bloomberg Surveillance in Jackson Hole, Wyoming last week. 

“The decline in inflation is welcome. But we’ve just had two good prints of inflation. That does not mean that the inflation monster has been conquered. There are still risks on the horizon and we will watch that very closely,” he said.

His comments came just days after data from the statistics office showed South Africa’s inflation had eased to a two-year low of 4.7% in July from 5.4% the month before.

The Reserve Bank’s monetary policy committee held interest rates at 8.25% last month after raising borrowing costs by a combined 475 basis points at its 10 prior meetings. It aims to bring inflation back to the 4.5% midpoint of its target range, where it prefers to anchor expectations.

The central bank expects inflation to average 6% this year, 5% in 2024 and 4.5% in 2025.

One of the risks to its forecasts is the currency, Kganyago said. 

“On the horizon, we actually see the exchange rate as one of the risks to the inflation outlook. So if there was to be a weakness in the currency, it does have implication for the inflation outlook,” he said. He also qualified that comment slightly by noting that the bank’s research has found the pass-through effect of currency weakness to price pressures has moderated.

The rand has depreciated almost 9% against the dollar this year, making it the fourth-worst performing emerging market currency of those tracked by Bloomberg. 

3. Proposal to widen employee tax net:

A proposed tax amendment aims to remove the distinction between resident and non-resident employers, requiring all employers to be registered with the South African Revenue Service (Sars). 

This means that foreign employers of South African tax residents, whether the employee lives and works in SA or not, will be required to withhold employees’ pay-as-you-earn (PAYE) tax.

This will “level the playing field” and ensure “alignment” with skills development levies and unemployment insurance payments by all registered employers, according to National Treasury. 

Cliff Dekker Hofmeyr associate Puleng Mothabeng says although the impact will only be revealed over time, it is not unlikely that it may discourage foreign employers from employing the services of South African residents.

“Prior to this amendment, foreign employers would also have run the risk of creating permanent establishments in South Africa and becoming liable for income tax, which is less than ideal. While the permanent establishment risk always existed, the additional employees’ tax burden adds another potential level of complexity,” she adds.

Ronny Levitan, SA head of global payroll platform Deel, says in a recent statement that economically active employees are crucial to the economy. Several other countries want to attract professionals.

“If South Africa wants to compete on that stage, it needs to provide a conducive environment, rather than making it difficult for digital nomads to make South Africa their place of work and leisure,” says Levitan.

“Similarly, foreign employers who see South Africa as a skills and talent location should be encouraged to grow their presence in this market,” he adds. 

The proposed change was announced in the February budget and given effect in the draft Tax Administration Laws Amendment Bill published at the end of July. Interested parties were given time to comment until the end of August. 

4. House prices increasing:

Buying a house in South Africa is becoming more challenging for average salary earners as the monthly repayments constitute a higher percentage of their salary.

This was revealed by an analysis by Daily Investor about the change in house bond repayments over the last two decades.

The monthly repayment of a property is set by two factors – the loan’s size, which is determined by the value of the property, and the interest rate on the loan.

The average residential property value grew by an annualised compounded growth rate of 8.27% since 2001.

The average interest rate level was much higher in the early 2000s than experienced in the past decade. It means that the cost of financing a house is much lower now.

The latest quarterly report by Ooba shows that the average house in South Africa currently costs R1,427,889.

If the owner obtained a home loan at the current prime rate of 11.75%, repayable over 20 years, the monthly payment would be R15,545.

To see how this monthly repayment compares with previous years, Daily Investor used the FNB residential house price index.

The value of the average house today was used and discounted back at the FNB index growth rate to determine the value of this “average” house in previous years.

The corresponding prime rate was then applied to calculate a specific monthly repayment for every scenario.

The average house price in 2021 was R249,824, and the prime rate was 15.25%. The monthly repayment would have been R3,336 when the house was purchased.

By 2013, the value of the same house increased to R921,721. It would have been financed at a prime rate of 8.5% with a monthly repayment of R7,999.

Five years later, the price increased to R1,213,055 and the prime rate increased to 10.25%. The monthly repayment of the house was R11,908.

However, the monthly repayments only tell part of the story. The average salary in South Africa should be considered to get a picture of house affordability.

BankservAfrica’s Take-home Pay Index showed that the average take-home salary in South Africa increased from R12,573 in February 2018 to R15,438 in February 2023.

This means that in 2018, the average monthly house repayment was lower than the average take-home pay.

Fast forward five years, and the average monthly house repayment now exceeds the average take-home pay.

It means that it is more difficult for the average South African to afford a house than what it was five years ago.

5. Govt to help with municipal debt:

Electricity Minister Kgosientsho Ramokgopa says government is planning on establishing ways to work with municipalities that owe Eskom to help pay off the debt.

This after electricity was disconnected for over five weeks to the Ditsobotla Municipality in the North West as a result of its R5 million debt to the power utility.

Ramokgopa said Ditsobotla was just one of many municipalities that owed Eskom.

“At last count, it was sitting at R62 billion and we did indicate that last time it was sitting at R4.2 billion and it continues to grow. And really, there’s no prospect of this municipalities first extinguishing that debt because of that erosion of the revenue base.”

Ramokgopa said that since some of these municipalities owed so much money, it’s not promising that they will be able to pay off all the debt.

All information sourced from articles posted by: BusinessTech, Fin24, Moneyweb, DailyInvestor, and EWN.

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