The South African Budget in a nutshell
South African Finance Minister, Mr Tito Mboweni, delivered his budget speech in the South African Parliament on Wednesday, 24 February. Just like his previous speeches, this was no easy task, and he had to, once again, pluck the proverbial rabbit out of the hat for the struggling South African economy. The speech was mostly received positively by the market, and the South African Rand strengthened considerably during and after his speech. However, some thought that the positivity would be short-lived.
Let's look at some key points of the budget and how it could affect Namibia, especially from an investment point of view.
- One of the most important aspects of the budget is overcoming the budget deficit over three years. SA is currently running on a budget deficit of 12.3% of the total GDP. Although this is lower than previously expected, it would be a big win if they are able to reach this target.
- On debt, which has been a major headache for the SA economy for several years, it is estimated that the downward spiral would start to stabilise at 88.9% of the total economy size or GDP. In 2019, that figure stood at only 62% of GDP and in 2015 below 50%. This situation has deteriorated drastically in recent years, but South Africa maintains its debt is under control.
- One positive aspect is that real income is approximately R100m more than budgeted. The excess will be used to settle debt and finance important issues such as vaccines and social development.
- With budget speeches people are usually anxious about potential undesirable tax implications, especially with a budget deficit, where one would expect tax increases. However, the budget brought very good news, especially for companies with the corporate tax rate lowered from 28% to 27%. Of course, this is positive for existing businesses and could attract new investments in the country, which will be good for economic growth and unemployment. On an individual level, the personal income tax sliding scales have increased by 5%, which means people should pay less tax. With inflation at 3.2% and potentially little salary increases over the last year, it should be a saving for individual taxpayers. Sin taxes saw an 8% increase in rates on alcohol and tobacco. Petrol charges will increase by 27 cents per litre which, in line with inflation.
- In terms of expenses, it is good to see that they are curbing expenses and that there is a shift from operational expenses to capital expenditure that provides a lasting benefit to the country. COVID programmes and vaccines are well funded, but the big holes in the state treasury, namely state wages and subsidies to state institutions, will have to receive urgent attention.
The implication for Namibia is that a stronger currency should indicate lower inflation going forward and keep interest rates low for longer. South Africa will also issue fewer government bonds which will mean their bond rates will be lower, which will also lower our bond rates. In short, the budget looks good on paper, but the market will wait for sustainable signs of lower debt, economic growth and decreased spending before becoming too overly optimistic.