The Medium-Term Budget Policy Statement (MTBPS) was lukewarm, with very little new information on what government is doing to tackle the serious fiscal risks facing State-owned enterprises (SoEs), says Absa Capital senior economist Peter Worthington.
Speaking at a joint Absa/Bureau for Economic Research presentation, in Cape Town, on Friday, he said he anticipated that South Africa would be downgraded by at least one ratings agency at the end of the year.
“There’s nothing in the MTBPS that mitigates the risk from credit agencies. We’re going to see at least one negative move.”
Worthington suggested that Moody’s may downgrade the country. Political risk was weighing very heavily, with some key announcements in the balance.
“If the patronage network gets rid of [Finance Minister Pravin] Gordhan and gets someone to sign off on nuclear and other projects, then South Africa’s credit future looks dim,” he added.
He said Gordhan had not spelled out progress on structural reform.
“Key areas where we need to get growth weren’t mentioned much at all. The comments on SoEs were not encouraging,” said Worthington.
He said government seemed to be backing away from merging South Africa’s three lossmaking State-owned airlines.
“It’s now going to appoint a technical adviser to advise on aspects of moving them into a holding company. There was very little new information on what government is doing to tackle serious fiscal risks, such as PetroSA’s funding shortfall.”
Worthington said there was also nothing new about labour market reforms.
“The proposal that, when unions go on strike, they have to ballot members in secret to reduce intimidation [in arriving at a decision on whether to strike or come to terms], seems to be off the table now. That’s a shame.”
He said the polarisation between labour and business needed to be ironed out.
The third area where Barclays Africa had hoped to see progress was ongoing regulatory uncertainty, particularly on mining and land issues.
Worthington said that, with climbing debt and lower growth, the economy faced a tough grind going forward.
He stated that South African consumers would face a hard time in the near future and should expect to feel the heat from a series of possible taxes.
This follows shortfalls in tax collections, as announced by Gordhan.
“We are going to see pain for consumers. Even if it’s not a value-added tax (VAT) increase, it’ll be excise taxes, a sugar tax, maybe a wealth tax. It’s going to come out of the wallets of consumers.”
Worthington said Gordhan had intimated that tax increases would not hurt the poor but the money needed to be found, as there was a shortfall of R12.5-billion alone from individuals.
He expected tax increases would probably be directed at higher-income consumers.
“At this stage, Treasury is not backing a VAT increase, which is unfortunate. We think it’s the best way to go. It’s the least distortionary. An increase in VAT to 15% would generate about R20-billion, but it’s probably politically impossible to do,” said Worthington.
He said a 35c/l increase in the fuel levy would generate R8-billion.
Worthington added that low growth had kept South Africa’s tax proceeds under pressure, with both corporate income tax and VAT receipts under significant pressure.
“One way or another the consumer is going to pay,” said Worthington.