20180801-法国巴黎银行-South_African_fiscal__Up_against_the_wall__10页_607kb

South African Fiscal Summary: Up Against the Wall

Core Content

South Africa's fiscal situation in the first quarter of the 2018/19 fiscal year (April–June) shows mixed results. While June revenue rebounded, the cumulative budget deficit for Q1 reached ZAR 27.6bn, slightly better than the same period in 2017 but still indicative of fiscal strain. The government faces challenges in maintaining fiscal discipline amid weak economic performance, poor corporate profitability, and rising public-sector costs.

Main Points

Revenue Performance

• Overall Revenue Growth: The 12-month rolling nominal tax revenue growth stood at 6.5% y/y in Q1, below the Treasury's projected 10.6%.
• VAT Increase Impact: A 1% increase in the VAT rate to 15% contributed significantly to the rebound in revenue, with VAT growth at 19.6% y/y.
• Corporate Tax Concerns: Corporate income tax (CIT) collections were weak, growing only 4.0% y/y, and showed a decline of nearly 13% in the first two months of the fiscal year.
• Personal Income Tax (PIT): PIT growth improved to 7.8% y/y in Q1, but remains below the historical average of over 9.0%.
• Fuel Levies: Fuel levies showed strong growth (+9.1% y/y), but are unlikely to be scrapped due to their importance in government revenue and the lack of fiscal cushioning.
• Excise Duties and Other Taxes: Excise duties also helped boost revenue (+11.9% y/y), but other sources like transfer duty and secondary tax on companies (STC) declined significantly.

Expenditure Trends

• Wage Bill: The public-sector wage bill exceeded budget expectations, with a cumulative overshoot of ZAR 30bn over the next three years.
• Socio-Economic Spending: Increased spending on programs like free tertiary education and national health insurance adds pressure on the budget.
• SOC Balance Sheets: State-owned companies (SOCs) like Eskom and South African Airways (SAA) are experiencing deteriorating balance sheets, requiring more government support.

Fiscal Outlook

• Deficit Risk: The main budget deficit for FY18/19 is expected to slip by 0.2–0.3 percentage points to around 3.8% + 0.2–0.3% = 4.0–4.1% of GDP.
• Moody's Outlook: Moody's is willing to give the new government up to 12 months to implement structural reforms before reconsidering the country's sovereign rating, which was placed on a stable outlook from negative in March.

Key Challenges

• Weak Domestic Demand: A weak domestic demand environment has limited the effectiveness of tax reforms.
• Low Inflation: Low inflation continues to dampen tax revenue growth.
• Labor Market Issues: A weak labor market and subdued unit labor cost (ULC) growth hinder personal income tax collections.
• Corporate Profitability: Corporate profitability metrics lag, and poor return on assets (ROA) is expected to negatively impact CIT collections in the coming quarters.
• Contingency Reserves: The ZAR 26bn contingency reserves have been fully utilized due to higher-than-expected wage settlements and additional bailouts for SOCs.

Structural Reforms and Policy Actions

• Importance of Reforms: The government needs to implement structural reforms to stabilize the fiscal outlook.
• Critical Areas: Policy actions in key areas such as mining and land reform are essential to address long-term economic challenges.
• Moody's Patience: Moody's has given the government a window of 12 months to deliver on promised reforms and improve institutional capacity.

Legal and Regulatory Notice

• Non-Independent Research: This document is non-independent research and may be subject to conflicts of interest.
• Marketing Communication: It is a marketing communication and not investment research.
• Confidentiality and Use: The document is for internal use and must not be shared without prior written consent.
• Disclaimer: BNPP does not offer investment, financial, legal, or tax advice. The information is for reference only and may be subject to change.

Conclusion

The South African fiscal position remains fragile in the early stages of the 2018/19 fiscal year. While some revenue improvements have been observed, particularly in VAT, the underlying challenges in corporate tax, public-sector wage costs, and SOC balance sheets persist. The government must act swiftly to implement structural reforms and address socio-economic needs to avoid further fiscal slippage and potential rating downgrades.