Figure 1: Expenditure continues to outpace revenue vs revenue performance and projections Revenue vs expenditure vs deficit 40 1 Revenue actual and projected 17 10 % GDP 1 30 8 7-3 -8 1989/90 1997/98 005/06 013/14 Budget Balance (Deficit-/Surplus+) Tax Revenue as % GDP Expenditure % GDP 0 10 0 6 4 0 003/04 007/08 011/1 015/16 019/0 Personal income tax VAT Corporate income tax Customs duties Sources: SARB, National Treasury With a new Finance Minister, October s mini-budget will be keenly watched, but will likely deliver a very similar path to the Budget released at the start of the year. This fiscal year the fiscal deficit as a % of GDP will likely widen (vs. projected), with above budgeted civil servant wage increases, while revenues are weak and previous tax buoyancy expectations were likely overly optimistic. Looking forward, reprioritisation of spending and the infrastructure fund are also on the cards, while revenue underperformance will likely spur some further debate on tax increases. Any actual material tax increases are not expected, occurring instead at the 019 budget. SA continues to face higher taxation, both indirectly and directly, but has failed to scale back real expenditure growth. Higher taxes and utility costs have contributed to slowing economic growth, and this partial procyclical fiscal policy stance (substantial tax increases) is likely to continue in the medium-term. Indeed, personal income taxes and the super wealthy (gross income of R7m plus) are likely to be discussed (but not hiked in the MTBPS), with the new Minister a wealth tax proponent. The rating agencies will look for fiscal slippage (widening deficit or higher debt projections as a % of GDP), and should the MTBPS deliver materially higher public sector debt (and indicate higher SOE contingent liabilities) projections, the credit rating agencies would see this as credit negative. This year the Medium-Term Budget Policy Statement (MTBPS) takes place on 4 th October 018, and revisions to SA s fiscal deficit, inflation, GDP and net debt projections are all expected, as well as information on potential future tax changes and funding for SOEs. Details (particularly finances) of the Economic Stimulus and Recovery Plan, with its objectives to ignite economic activity, restore investor confidence, create jobs, aid the vulnerable and repair municipalities, are also expected. Figure : National revenue, expenditure and borrowings: R million unless otherwise stated Aug 018 Fiscal year to 018/19 % of Last year: % date budget budget budget Revenue: 115 684 489 18 1 31 146 37.0 36.8 Expenditure: 13 550 60 645 1 51 00 41.0 41.4 Deficit/borrowings: 7 866 131 47 191 054 68.7 67.5 Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 1
Figure 3: Financing R million August 018 August 017 Domestic short-term loans (3 681) 8 66 Domestic long-term loans 15 50 14 679 Foreign Loans - - Change in cash and other balances1 (3 704) (10 690) Total financing (net) 7 866 1 614 1) A negative value indicates an increase in cash and other balances. A positive value indicates that cash is used to finance part of the borrowing requirement Figure 4: Main Budget Balances 011/ 01/ 013/ 014/ 015/ 016/ 017/ 018/ 019/ 00/ 1 13 14 15 16 17 18 19 0 1 Budget 010-5.0% -4.1% MTBPS 010-4.6% -3.9% -3.% Budget 011-5.3% -4.8% -3.8% MTBPS 011-5.5% -5.% -4.5% -3.3% Budget 01-4.8% -4.6% -4.0% -3.0% MTBPS 01-4.% -4.8% -4.5% -3.7% -3.1% Budget 013-3.9% -5.% -4.6% -3.9% -3.1% MTBPS 013-3.6% -4.% -4.% -4.1% -3.8% -3.0% Budget 014-3.7% -4.3% -4.0% -4.0% -3.6% -.8% MTBPS 014-3.7% -4.3% -3.9% -4.1% -3.6% -.6% -.5% Budget 015-3.6% -4.1% -3.8% -3.9% -3.9% -.6% -.5% MTBPS 016-3.6% -4.1% -3.8% -3.6% -3.8% -3.3% -3.% \ -3.0% Budget 017-4.7% -5.0% -4.4% -4.3% -4.1% -3.9% -3.5% -3.3% -3.3% MTBPS 017-4.3% -4.1% -3.8% -4.7% -4.5% -4.6% -4.6% Budget 018-4.7% -5.0% -4.4% -4.3% -4.1% -3.8% -4.6% -3.8% -3.8% -3.7% Figure 5: Expenditure ceiling 1 R billion/percentage change 015/16 016/17 017/18 018/19 019/0 00/1 016 Budget Review 1 076 705 1 15 833 1 40 086 1 339 4 016 MTBPS 1 074 99 1 144 353 1 9 74 1 33 465 1 435 314 017 Budget Review 1 074 970 1 144 5 1 9 83 1 33 553 1 45 408 017 MTBPS 1 074 970 1 141 978 1 33 7 1 316 553 1 40 408 1 54 018 Budget Review 1 074 970 1 141 978 1 3 678 1 315 00 1 416 597 1 53 76 1) Non-interest spending financed from the National Revenue Fund excluding skills development levy, special appropriations in 015/16 for Eskom and the New Development Bank, debt management and Gold and Foreign Exchange Contingency Reserve Account transactions and the International Oil Pollution Compensation Fund Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za
Figure 6: Gross debt-to GDP outlook and Budget deficit projection slightly wider 65 Gross debt to GDP outlook 6.4 6.8 63.3 % of GDP Budget deficit projection 59.7 60.861.6 0 % of GDP 60-1 58. -1 57.0 55.3 56. 56.1-55.3 55 54. 53.3 55.1 56.0 56. 5.35.9 5.4 55.7-3 51.9 50.5-4 50 5. 51.3 49.0 50.7-4.1-3.8-3.6-3.7-3.5-3.6-3.6-3.5-5 49. 46.5-5.3-4.8-4.3-6 45 43.8-7 40 41.1-8 -7.3 01/13 015/16 018/19 01/ 04/5 008/09 011/1 014/15 017/18 00/1 017 MTBPS 017 Budget 018 Budget Consolidated budget deficit Moody s recently released a regular update on its credit opinion of South Africa, warning of a rating downgrade if South Africa fails to stabilize its debt, lift economic growth or/and sees an increase in the likelihood that SOE contingent liabilities will lift its sovereign debt burden. The agency recognises the socio political issues in SA which has led to populist spending pressure in a low growth, high unemployment environment, as poverty levels are substantial. However, it is also reported to highlight, as it did in its March review, that the change in political leadership in SA this year is expected to bolster institutional strength, strengthen government s resolve to fiscal consolidation, and improved financial governance of the SOEs, as well as strengthening the outlook for GDP growth. Indeed such a positive outcome above, if it occurs, is signalled as supportive of a credit rating upgrade. Figure 7: Share of total tax expenditure per tax type and tax expenditure as a share of tax revenues and nominal GDP Share of total tax expenditure per tax type % Tax expenditure as a share of tax revenues and % nominal GDP 15. 3.9 015/16 37 5 35 3 15.0 3.8 01/13 4 3 38 17 14.8 14.6 3.7 14.4 % 0 0 40 60 80 100 Personal income tax Corporate income tax Value-added tax Customs and excise duties 3.6 01/13 013/14 014/15 015/16 Tax expenditure/gross tax revenue Tax expenditure/nominal GDP (right axis), Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 3
Figure 8: Consolidated government fiscal framework, 015/16-00/1 015/16 016/17 017/18 018/19 019/0 00/1 R billion/percentage of GDP Outcome Revised Medium-term estimates Revenue 1 15.3 1 85.7 1 353.6 1 490.7 1 609.7 1 736.9 9.5% 9.% 8.8% 9.7% 9.9% 9.9% Expenditure 1 366.3 1 441.8 1 558.0 1 671. 1 803.0 1 941.9 33.1% 3.7% 33.% 33.3% 33.4% 33.4% Budget balance -151.0-156.1-04.3-180.5-193.3-05.0-3.7% -3.5% -4.3% -3.6% -3.6% -3.5% Primary Balance -13. -5.9 5.5 0.3 45.7 60.6-0.3% -0.1% 0.1% 0.4% 0.9% 1.1% Figure 9: Main budget revenue and non-interest spending 8 Per cent of GDP 6 4 0 005/06 006/07 007/08 008/09 009/10 010/11 011/1 Revenue 01/13 013/14 014/15 015/16 016/17 017/18 Non-interest spending 018/19 019/0 00/1 Figure 10: Macro-economic forecasts, National Treasury vs. Investec 017 018 019 00 Final household consumption 1.3 1.7 1.9.3 Investec. 1. 1.9.5 Gross fixed capital formation 0.3 1.9 3.3 3.7 Investec 0.4-0.1 1.6 3.5 Exports 1.5 3.8 3.4 3.5 Investec -0.1.6 4.1 6.0 Imports.7 4.4 4.6 4.5 Investec 1.6 3.0 4. 6.3 Real GDP 1.0 1.5 1.8.1 Investec 1.3 0.7 1.9.3 CPI Inflation 5.3 5.3 5.4 5.5 Investec 5.3 4.6 5. 5.0 Current account deficit (% GDP) -. -.3 -.7-3. Investec -.4-3.6-3.3-3., Investec Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 4
Figure 11: Borrowings: R million unless otherwise stated 016/17 017/18 018/19 019/0 00/1 Outcome Budget Revised Medium-term Estimates Domestic short-term loans 40 507 1 000 33 000 14 00 700 30 000 Domestic long-term loans 174 034 191 500 193 800 191 000 00 500 08 900 Foreign loans 5 070 9 600 33 895 38 040 39 10 40 650 Change in cash and other -5 98-1 4-14 65-18 994 39 137 77 balances Total borrowing 40 69 0 876 46 043 4 46 301 547 8 77 A positive /negative change indicates a decrease/increase in cash balances. The previous core factors underpinning the rating remains the strength of the judiciary, sophistication and depth of SA s financial markets, the health of the banking system and low levels of foreign debt. Moody s continues to believe that SA will achieve fiscal consolidation over its medium-term framework. The October MTBPS (Medium-Term Budget Policy Statement) will consequently remain key to Moody s ongoing assessment, the last of the three key agencies to have South Africa rated investment grade. The rating is on a dual basis (both foreign and local currency long-term sovereign debt) on Baa3, and loss of this investment grade rating is estimated to result in higher borrowing costs, marked currency weakness and upward pressure on short-term interest rates. Historically, countries which have seen their ratings from the key agencies migrate from investment to sub-investment grade have had a significant market impact. Indeed, Russia, Turkey, Brazil and Hungary saw their ten year government bond yields rise by about 130bp on average at the time of downgrade, versus three months before. The historic average in a migration from investment to subinvestment grade for these four countries shows about a 0bp rise in short-term interest rates. The SARB previously estimated up to a 75bp rise in the repo rate, which could temper the money market interest rate moves somewhat in comparison, to closer to 100bp, or likely less. In addition, South Figure 1: Total public-service employment; Average cost-of living adjustments and inflation Total public-service employment Millions 1 % Average cost-of-living adjustments and (full-time equivalants) inflation 10 1.3 8 1. 6 1.1 1.0 4 Salary level 1-1 Management (level 13-16) CPI inflation, Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 5
Figure 13: Contribution to gross tax revenue and comparative standard VAT rates by country* Contribution to gross tax revenue by tax Comparative standard VAT rates by country* % instrument, 016/17 1 Persons and individuals Value-added tax Companies Fuel levy Customs duties Specific excise duties Dividend withholding tax Skills development levy Electricity levy Transfer duties 0 10 0 30 40 % of gross tax revenue *Rates are for 017 and 018. The OECD rate refers to an unweighted average 14 7 0 Argentina United Kingdom Madagascar Morocco Cameroon OECD India Russia Turkey Ivory Coast Rwanda Tanzania Uganda Brazil China Mozambique Malawi Mexico Kenya Ghana Mauritius Namibia Zimbabwe South Africa Botswana Indonesia South Korea Japan Nigeria Saudi Arabia, Figure 14: Corporate income tax as a share of GDP* and nominal spending growth by function over MTEF % Corporate income tax as a share of GDP* Nominal spending growth by function over 7 MTEF 6 5 Post-school education and training Debt-service costs Social protection 7.9 9.4 13.7 4 3 Health Economic development Community development 7.8 7.4 7.4 Basic education Peace and security 5. 1 General public services 000 003 006 009 01 015 % 4.3 OECD Africa South Africa 0 4 6 8 10 1 14, *Average corporate income tax to GDP ratios for OECD and 16 African countries (Cape Verde, Cameroon, Democratic Republic of the Congo, Ivory Coast, Ghana, Kenya, Mauritius, Morocco, Niger, Rwanda, Senegal, South Africa, Swaziland, Togo, Tunisia and Uganda) 6.8 Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 6
Figure 15: Bond yields before and after a downgrade from investment grade to sub-investment grade y prior 1y prior 6m prior 3m prior downgrade 3m post 6m post 1y post y post Brazil 1.79 1.43 15.08 15.58 16.08 1.59 11.99 10.5 018 Russia 6.69 8.33 9.45 1.03 13.41 11.17 11.75 9.8 8. Turkey 6.85 10.54 9.51 9.85 11.04 10.3 10.35 018 Hungary - - 7.30 8.1 10.1 8.86 7.75 6.1 Average 8.78 10.43 10.34 11.4 1.69 10.71 10.46 Currencies before and after a downgrade from investment grade to sub-investment grade y prior 1y prior 6m prior 3m prior downgrade 3m post 6m post 1y post y post Brazil.34.86 3.58 3.84 3.96 3.61 3.6 3.11 018 Russia 30.36 35.48 36.94 50.6 61.66 49.97 69.11 76.34 58.41 Turkey 3.35.95.99 3.11 3.88 3.55 3.53 018 Hungary 40.7 180.4 6.5 15.1 44.9 5.7 16.4 7.8 Average 69. 55.4 67.5 68.1 78.6 70.7 73.08 Source: Rating Agencies, IRESS, IHS, Bloomberg s, Investec Africa has a sophisticated financial market, and the impact of the downgrades could be less severe than Russia, Turkey, Brazil and Hungary experienced. A significant downgrade is partially priced in for South Africa, while investors may also see higher yields as a buying opportunity. The market period, i.e. risk-on or risk-off, also will have a material impact, particularly on the rand effect. The revisions to South Africa s key fiscal projections in the MTBPS versus the Budget, namely the fiscal deficit and debt as a % of GDP, along with projected expenditure versus the expenditure ceiling, are not expected to be substantial. The fiscal deficit projection in the Budget for 018/19 is likely to widen Figure 16: Estimates of individual tax payers and taxable income, 018/19 Income tax Registered Taxable payable Taxable bracket individuals income before relief Income tax relief Income tax from medical Income tax payable after proposals Number % R bn % R bn % Rbn % R bn % R bn % 0 R70 000 1 6 557 45 170. R70 001 R150 000 50 678 33.4 6.0 10.8 11.1. -0.9 1.5 0.04 5.0 10..0 R150 001 R50 000 1 790 80 3.9 351.8 14.5 34.3 6.7-1.3 17.3 0.16 3.1 33. 6.6 R50 001 R350 000 1 178 901 15.7 349.8 14.4 51.6 10.1-1.3 18.4 0.15.1 50.5 10.0 R350 001 R500 000 934 615 1.5 386.8 15.9 74. 14.5-1.6 1.5 0.15 1.9 7.7 14.4 R500 001 R750 000 576 469 7.7 348.4 14.3 85.6 16.7-1. 16.1 0.10 14.3 84.5 16.7 R750 001 R1 000 000 33 65 3.1 00.7 8.3 58.4 11.4-0.5 6.5 0.04 6.1 58.0 11.5 R1 000 001 R1 500 000 161 014. 19.3 7.9 6.4 1. -0.3 4.5 0.03 4.4 6.1 1.3 R1 500 001+ 109 783 1.5 339.4 14.0 134.8 6.3-0. 3.1 0.0 3. 134.6 6.6 Total 7 487 39 100 431 100 51.5 100-7.3 100 0.70 100 505.8 100 Grand total 14 044 637 601 51.5-7.3 0.70 505.8 Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 7
Figure 17: Rating Agency and Market Views Moody s Standard & Poor s Fitch Ratings Long-term Foreign Currency Debt Long-term Foreign Currency debt Long-term Foreign Currency Debt Baa3 BB BB+ Stable Stable Stable Long-term Domestic Currency Debt Long-term Domestic Currency Long-term Domestic Currency Debt Debt Baa3 BB+ BB+ Stable Stable Stable Source: Moody s, Standard & Poor s, Fitch Figure 18: Consolidated fiscal framework, 017/18 00/1 (Rbn and %) MTBPS 017 017/ 18 Budget 018 017/ 18 MTBPS 017 018/ 19 Budget 018 018/ 19 MTBPS 017 019/ 0 Budget 018 019/ 0 MTBPS 017 00/ 1 Budget 018 00/ 1 Revenue 1 363.6 1 353.6 1 477.5 1 490.7 1 594. 1 609.7 1 709.3 1 736.9 % of GDP 9.% 8.8% 9.7% 9.7% 30.0% 9.9% 9.9% 9.9% Expenditure 1 566.6 1 558.0 1 670.6 1 671. 1 80.3 1 803.0 1 935.1 1 941.9 % of GDP 33.5% 33.% 33.6% 33.3% 33.9% 33.4% 33.9% 33.4% Non-interest expenditure 1 49.8 1387.6 1 333.5 1 483.4 1 438.7 1 596.9 1 544.1 1 718.0 % of GDP 6.7% 9.5% 6.8% 9.5% 7.1% 9.6% 7.0% 9.6% Budget balance -03.0-04.3-193.1-180.5-08.1-193.3-5.8-05.0 Percentage of GDP -4.3% -4.3% -3.9% -3.6% -3.9% -3.6% -3.9% -3.5% Gross domestic product 4 67. 4 699.4 4 968.1 5 05.4 5 315.5 5 390.1 5 716.7 5 808.3 Figure 19: Public-sector infrastructure spending R billion 50 00 150 100 50 % of GDP 0 0 1998/99 000/01 00/03 004/05 006/07 008/09 010/11 01/13 014/15 016/17 State-owned companies Provincial departments Local government Public entities Public-private partnerships National departments Total as a share of GDP (right axis), Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 8 6 4 8
Table 0: Selected government guarantee exposure 015/16 016/17 017/18 R billion Guarantee Exposure Guarantee Exposure Guarantee Exposure Public institutions: 469.9 55.8 475.7 90.4 466.0 300.4 Eskom 350.0 174.6 350.0 0.8 350.0 0.8 SANRAL 38.9 7. 38.9 9.4 38.9 30.1 Trans-Caledon Tunnel Authority 5.8 1. 5.6 0.9 5.7 18.7 South African Airways 14.4 14.4 19.1 17.8 19.1 11.8 Land and Agricultural Bank of South Africa 6.6 5.3 11.1 3.8 9.6 6.6 Development Bank of Southern Africa 13.9 4.4 1.5 4.1 1.3 4. South African Post Office 4.4 1.3 4.4 4.0 0.4 0.4 Transnet 3.5 3.8 3.5 3.8 3.5 3.8 Denel 1.9 1.9 1.9 1.9.4.3 South African Express 1.1 0.5 1.1 0.8 0.8 0.8 Industrial Development Corporation.0 0. 0.4 0. 0.5 0.1 South African Reserve Bank 3.0 3.0 Independent power producers 00. 114.0 00. 15.8 00. 1. Public-private partnerships 3 10.3 10.3 10.0 10.0 9.6 9.6 Total amount of borrowing and accrued interest for the period under review. 3 These amounts only include National and provincial PPP agreements. to -3.8% of GDP from -3.6% of GDP in the Budget, while in 019/0 it is likely to be unchanged from -3.6% of GDP, and 00/1 lowered to -3.4% of GDP (-3.5% previously), with 01/ added in, at -3.4% of GDP. Government s gross loan debt was projected to peak at 56.% of GDP by 01/ in the February 018 Budget, and realistically cannot rise much further without concerning rating Figure 1: Revisions to main budget revenue and expenditure estimates 017/18 018/19 019/0 017 018 017 018 017 018 R billion/% of GDP Budget Budget Budget Budget Budget Budget Current payments 38.8 384.4 413.3 409.8 445.0 443.5 Compensation of employees 154.7 155.7 163. 163.6 175. 175.8 Goods and services 65.7 65.4 69.3 65.9 7.3 69.9 Debt-service costs 16.4 163. 180.7 180.1 197.3 197.7 Transfers and subsidies 999.1 993. 1 079.6 1 069.5 1 153.0 1 159.7 Payments for capital assets 15.8 15.1 14.1 14.3 14.5 14.3 Payments for financial assets 5.4 19. 5.0 4.6 5. 4.7 Contingency/ unallocated reserve 6.0-10.0 8.0 0.0 8.0 Total 1 409. 1 411.9 1 5. 1 51. 1 65. 1 63.6 % of GDP 9.7% 30.0% 9.7% 30.1% 9.8% 30.3% Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 9
Figure : Consolidated government expenditure, Investec agencies. Similarly the expenditure ceiling is not expected to be breached in the projections, at least not for a sustained period, and may be lowered in the later years. The reprioritization of government expenditure to accommodate the R50bn identified in the Economic Stimulus Recovery Plan (ESRP) will be announced in the MTBPS, and much will likely come from unspent funds, with diversion in future funding from underperforming areas to the government initiatives. The ESRP has a range of measures, both financial and non-financial, aimed at igniting economic activity, restoring investor confidence, creating new jobs, aiding the vulnerable and embarking on a number of interventions into municipalities. Reprioritization of public spending within the current budget will occur (not a higher level of expenditure then budgeted) towards five areas to create jobs, the implementation of growth enhancing reforms, to establish an infrastructure fund, address health and education and invest in municipal social infrastructure improvement. Additionally, township industrial parks are planned. Davis Tax Committee has concluded its work, and the MTBPS may see the announcement of a new tax commission or committee to investigate sources of government revenue. The new Finance Minister, Tito Mboweni, will deliver the MTBPS, and has previously indicated his keen support for wealth taxes in SA. However, with much of the work on the MTBPS likely competed by National Treasury before the appointment of the new Minister of Finance, and with the Minister coming into a very large body of work to contend with, the MTBPS is not expected to show any marked deviations from February s Budget. Annabel Bishop Investec Bank Limited Tel (711) 86 7188 email: annabel.bishop@investec.co.za 10
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