20180213-法国巴黎银行-South_Africa_budget_preview__Show_me_the_money__12页_477kb

South Africa Budget Preview Summary

Core Content

This document provides an analysis of South Africa's upcoming national budget, expected to be presented on 21 February, and outlines the key fiscal challenges and potential measures the government may take to address them. The focus is on deficit and debt consolidation, revenue generation, expenditure cuts, and the impact of state-owned enterprises (SOEs) on the fiscal outlook.

Main Fiscal Targets

• The budget is expected to show a modest return to fiscal consolidation, with the main budget deficit narrowing from 4.6% of GDP in FY2017/18 to 4.1% by FY2020/21.
• The gross debt-to-GDP ratio is anticipated to stabilise below 60% by FY2020/21, from an estimated 54% in FY2017/18.
• The Treasury aims to reignite growth and improve fiscal sustainability through targeted expenditure and revenue measures.

Expenditure Cuts

• Public sector wage bill is a key area for cuts, as it accounts for nearly 40% of non-interest consolidated expenditure.
• The government is likely to implement expenditure reductions of ZAR 25bn in the first year, with further cuts planned.
• Employee cost containment is critical, especially in sectors like defence and provincial healthcare.
• Reduction in public sector headcounts is necessary to achieve fiscal targets.
• Capex reprioritisation is expected, with around ZAR 1 trillion in planned capex over the next three years, 50% of which relates to SOEs.
• Potential capex cuts of ZAR 10-15bn per year are possible to buy time for fiscal consolidation.

Revenue Generation

• Tax buoyancy remains weak, with nominal tax revenues growing slower than nominal GDP.
• A 1 percentage point increase in VAT is likely, as it would generate ZAR 15-20bn in additional revenue.
• Alternatively, removing the zero VAT rating on fuel could be considered, though it may have a more immediate impact on inflation.
• Other potential revenue measures include a wealth tax on high-income earners, higher taxes on luxury goods, and increased property transfer duties and estate taxes.
• Free tertiary education for the poor and working class will require an initial ZAR 12bn in funding, but its long-term fiscal sustainability is questionable.

SOE Challenges and Governance

• Eskom remains the largest fiscal risk due to liquidity and profitability issues.
• Governance reforms and private-sector participation are expected to be addressed.
• Guarantee exposures for SOEs, particularly Eskom, are a key concern.
• The reconfiguration of Eskom's business model and conversion of debt into equity are potential measures.
• SOE privatisation is likely to be discussed, but progress is expected to be slow due to political and structural challenges.

Impact on Inflation and Monetary Policy

• A VAT increase could lead to a 0.6pp rise in CPI inflation for 2018, potentially limiting SARB's ability to cut interest rates.
• The SARB may delay rate cuts if a VAT hike is implemented.
• The short-term inflationary pressure is expected to be manageable, with the impact working its way out of the base by April 2018.

Ratings Outlook

• Moody's is likely to review South Africa's credit rating in late February or March, with a high hurdle to avoid a downgrade.
• The fiscal improvements and reforms in SOE governance under the new ANC leadership could help secure a ratings reprieve.
• However, fiscal credibility and policy consistency will be crucial in influencing Moody's decision.

Conclusion

• The budget is expected to deliver a more clear-cut fiscal strategy, with a focus on expenditure cuts and revenue enhancements.
• Fiscal consolidation is necessary to regain credibility and avoid further credit ratings downgrades.
• The road to fiscal stability will be challenging, with tough choices on both the revenue and expenditure sides.
• SOE reform and private-sector engagement will play a central role in improving the fiscal outlook.

Key Challenges

• Balancing growth and fiscal discipline.
• Managing inflationary pressures from tax reforms.
• Ensuring fiscal sustainability of new social programs like free tertiary education.
• Addressing governance and liquidity issues in SOEs.
• Maintaining market confidence and ratings stability.

Summary of Expected Measures

• Expenditure Cuts: Further reductions in public sector wages, headcount reductions, and capex reprioritisation.
• Revenue Measures: 1pp VAT increase, removal of zero VAT ratings on fuel, and possible additional taxes on high-income and luxury goods.
• SOE Reforms: Governance improvements, private-sector participation, and restructuring of debt and operations.
• Fiscal Targets: Deficit reduction to 4.1% of GDP by FY2020/21 and stabilisation of debt-to-GDP ratio below 60%.

Risks and Outlook

• Ratings downgrade risk remains high, despite potential fiscal improvements.
• Political and economic uncertainty could hinder the implementation of fiscal reforms.
• SARB's monetary policy may be constrained by the need to manage inflationary pressures.
• SOE liquidity and profitability will continue to be a major concern for the government and ratings agencies.

Additional Notes

• The budget will be a critical macro event for the first quarter.
• Fiscal credibility is key to both ratings agencies and market confidence.
• Long-term growth potential is constrained by structural challenges and the need for fiscal restraint.