14 Feb 2018

Rand note: The domestic currency has pierced R11.70/USD, but the Budget and Moody's rating review looms

Annabel Bishop

Chief Economist

  • The rand has strengthened to R11.5997/USD, R14.48/EUR and R16.31/GBP today, piercing the resistance level of R11.70/USD convincingly, but repelled by the significant resistance level of R11.60/USD, although comments by SA’s new President, Cyril Ramaphosa at the upcoming SONA, may propel the domestic currency convincingly through R11.60/USD.
  • The rand has retraced somewhat to R11.63/USD, R14.52/EUR and R16.38/GBP as it consolidates recent gains. Market optimism towards SA has risen further with net foreign portfolio flows into SA’s equity market now close to R40bn since Cyril Ramphosa’s election to President of the ANC, and incoming data is likely to show further inward investment on his recent investiture as President of SA.
  • The good gains the rand has made could be extended towards R11.55/USD, and move towards R11.00/USD baring any further credit rating downgrades for SA and a credit positive budget. The good news is that GDP growth might surprise on the upside in Q4.17 and Q1.18, lessening the fiscal deficit for 2017/18 to -4.0% GDP (previous estimate -4.3% GDP).
  • However, it is the 2018/19 deficit and borrowings (net/debt) projections which will be in particular focus for the markets and the credit rating agencies, as well as the projections on these metrics over the rest of the medium term expenditure framework period (MTEF). 
  • But just as much as the rating agencies are watching for fiscal consolidation, so they are watching for the avoidance of excessive indirect and direct tax hikes that would strangle economic growth. South Africa is only currently expected to see economic growth of around 1.5% y/y this year, and slightly higher next year as many areas of SA’s previous institutional strengths need to be repaired.
  • The risk is that economic growth can fall back towards 2016’s 0.3% y/y instead this year and next if private sector spending stalls (on excessive tax hikes). The credit rating agencies worry about SA’s anaemic economic growth rate, and concomitant poor GDP per capita performance, just as much as they worry about the hefty rise in borrowings and so insufficient fiscal consolidation. 
  • Despite some political change and perceived improved governance at Eskom, little further tangible progress has to date yet occurred to avoid junk status from Moody’s after the severe 2017 MTBPS’s fiscal slippage. Consequently, the Budget will be scrutinised for cost savings, improved economic-growth-led revenue forecasts and lower borrowings.
  • Wealth taxes are expected to rise in areas like CGT and estate taxes (although not officially deemed wealth taxes), while a land tax has also been mooted (above municipal rates and taxes), and pressure on HNWIs is merely expected to increase. This is expected to increase externalisation of assets as the tax burden becomes ever heavier. 
  • Sin taxes (on alcohol, tobacco etc) are expected to rise as usual in the Budget as well as government taxes on fuel. VAT on fuel has been discussed, which could add a substantial amount to tax revenues, but would increase the tax burden across all income bands, but particularly for the poor whose expenditure on travel already makes up a very large part of their monthly expenditure. 
  • What is likely is no relief for bracket creep once again in the upper and upper middle income bands, which will help fill government coffers along with the already announced sugar tax for this year. Last year an additional top tax bracket was introduced, of 45% for incomes above R1.5m per annum, and the Budget could institute either a hike to 46% or replace this top tier with another starting at R2.5m per annum with a new top marginal tax rate. 
  • Corporate tax rates are not expected to rise as they are already high, but then so are personal income taxes compared to many other peer economies. Expenditure pressures from an extension of free tertiary education fees and escalating interest payments on debt (to the largest expenditure item) will also need to be addressed.
  • The Budget is likely to be tight and tough, while expectations will be for an improved economic growth outlook (and so higher GDP growth forecasts), while fiscal consolidation is necessary in future years. Free market reforms are also necessary to support the upswing in investor sentiment since end December, and allow it to translate into faster economic growth and substantially reduced unemployment.
  • A big ask, but we will receive indications on all of this from the SONA indicated for tomorrow night, and presented by President Ramaphosa, who could well deliver a cheering speech with reference to overcoming key impediments to faster economic growth in SA, such as overcoming the impasse in the mining sector and other policies that have deterred private sector fixed investment (both foreign and domestic).