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 "This article is for the financial schooled, but should offer some pointers the rest of us on what the sentiment is on the South African financial market." - Mark |
| South Africa: Sharing the Growth Dividend |
| By Riccardo Barbieri (London) |
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February 28, 2005 The 2005/06 budget builds on a strong revenue performance in the current fiscal year. The government now estimates that the main budget deficit for the fiscal year ending in March will be equivalent to only 2.3% of GDP. The original target in the 2004 Budget (February 2004) was 3.1%, and was actually revised up to 3.2% in the 2004 Medium Term Budget Policy Statement (MTBPS) published in October. Our latest estimate was 2.7% of GDP. The out-performance with respect to the budget is all on the revenue side. Indirect taxes yielded R11.0 billion more than expected (0.8% of GDP), due in particular to the strength in retail and new auto sales. Income taxes yielded a smaller surplus of R1.1 billion. Debt-servicing costs were R1.5 lower than expected, thanks to the decline in interest rates and to the appreciation of the rand (given its effects on hard-currency debt costs). On the other hand, non-interest spending was higher than budgeted, particularly for transfers and subsidies (R5.5 billion). This was financed in part by a R2.5 billion reserve. As a result, the budget deficit is now estimated to be R9.8 billion lower than budgeted, at R32.2 billion. The out-performance has been split between a lower deficit, increased spending, and tax cuts. The deficit target for 2005/06 is lower than envisaged in the MTBPS, in absolute terms and, even more, as a percent of GDP. The projected deficit-to-GDP ratio is 3.1% instead of 3.5%. The budget balance excluding interest payments (primary balance) shows a 0.4%-of-GDP surplus, versus a mere 0.1% in the MTBPS. Thanks to a higher level of GDP compared to the MTBPS (growth in 2004 was stronger than expected and the national accounts revision also raised slightly the level of GDP), the ratio of total revenues and of non-interest spending to GDP is slightly lower than in the MTBPS. On the other hand, the decline in the primary balance compared to the current fiscal year is 0.8 percentage points of GDP, versus the 0.4 points envisaged in the MTBPS. This results from a combination of tax cuts and expenditure increases (though the ratio of expenditures to GDP, at 23.8%, is lower than the 24.6% featured in the MTBPS). A moderate cut in income taxes, a hike in excise taxes. Personal income taxes are being cut by a projected R6.8 billion, benefiting lower incomes in particular. The threshold for exemption from the tax on interest income is being raised. The rate of corporate income tax is cut from 30% to 29%. On the other hand, motor vehicle and travel allowances are being reduced and excise taxes are being raised. The tax on liquid fuels rises by 10 cents, which we reckon will raise petrol prices by some 2.4% in March. Excise taxes on alcohol and tobacco are also being hiked, as is now customary. Non-interest expenditures higher than in the MTBPS. The level of non-interest spending in 2005/06 will be R4.3 billion higher than in the MTBPS, owing largely to an increase in social security grants. As noted above, the latter was the only area of over-spending this year and the government is in part acknowledging that and in part raising benefits. Expenditure increases are also envisaged for education, the police, municipal services, and the land-redistribution program. Infrastructure investment set to rise significantly in 2005/06. Consistent with the goal of raising the investment rate of the economy and the quality of infrastructure, the government plans to take total public-sector investment from an estimated 5.2% of GDP in 2004/05 to 6.0% in 2005/06 and to 6.6% by 2007/08. In the 2005/06 fiscal year, almost half of the increase should come from public enterprises and be financed outside the main budget. As explained in the MTBPS, the emphasis will be on the transportation sector (railways and ports in particular) and on the energy sector. As regards investment by national, provincial and municipal departments, the bulk of public investment will go to schools, hospitals, roads, and water and electricity distribution. On the whole, the budget is stimulatory, but the underlying projections are realistic. In addition to having reduced the deficit/GDP target, the Treasury appears to have based its projections and policy changes on macroeconomic and fiscal projections that do not look to us unduly optimistic. For instance, the projected real GDP growth rate this year is 4.3%, only marginally higher than our 4.0% forecast. Importantly, private consumption is expected to grow by 4.7%, down from an estimated 5.9% in 2004. This implies a less buoyant trend for indirect taxes. In fact, the projected increase of indirect tax revenues in 2005/06 is 10.8% in nominal terms, versus 19.0% in 2004/05. If the Treasury had extrapolated the accelerating trend in retail sales seen through November, it could have pencilled in much higher indirect tax revenues. Likewise, revenues from income taxes in 2005/06 are projected to grow by only 5.8%, against 10.6% in 2004/05, even though falling interest rates and strong domestic demand are offsetting the impact of the strong rand on corporate profits. While one can picture scenarios in which tax revenues would undershoot such projections, we believe it is more likely that they will again exceed targets. We are lowering our budget deficit estimate for 2005/06. Given the information and the policy changes contained in the budget, we are aligning our 2004/05 budget deficit estimate with the official one and we are cutting our forecasts for 2005/06 and 2006/07 to 2.8% and 3.0%, from 3.4% and 3.2%, respectively. This compares with new official targets of 3.1% in 2005/06 and 3.0% in 2006/07. As noted above, we believe that in 2005/06 tax revenues could outperform the estimates of the government. A small undershoot is also likely on debt-servicing expenditures, we think. Furthermore, we believe that expenditures will be closer to target than in 2004/05. The borrowing requirement will be lower than previous projections. The government has reduced significantly not only its estimate of the public sector borrowing requirement (PSBR) in 2004/05, but also its projection for 2005/06. Importantly for the bond market, the new PSBR projection is lower than the old one not only as a ratio to GDP, but also in nominal terms. Despite increased borrowing by Eskom and Transnet, the cumulative PSBR projected for 2005-2008 is R25 billion lower than in the MTBPS. Reference: Morgan Stanley - Global Economic Forum 
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