20171011-法国巴黎银行-South_Africa__Buoyancy_blues_12页_575kb

Summary of "South Africa: Buoyancy blues"

Core Content

This document provides an analysis of South Africa's fiscal and economic challenges, focusing on the upcoming Medium-Term Budget Policy Statement (MTBPS) by Finance Minister Malusi Gigaba, and the implications for tax revenue, public spending, and the country's credit rating. The analysis is based on BNP Paribas South Africa's macroeconomic forecasts and assessments of tax buoyancy and stability.

Main Challenges for the Finance Minister

• Economic Weakness: South Africa faces weaker growth, inflation, and revenue collections, which will likely delay deficit consolidation.
• State-Owned Enterprise (SOE) Struggles: SOEs, including South African Airways (SAA) and Eskom, are in financial trouble and may require further capital injections, increasing fiscal pressure.
• Ratings Risk: Ratings agencies are closely watching the government's ability to maintain fiscal discipline, and further downgrades are expected by mid-2018.
• Political Uncertainty: The political climate, including corruption allegations and the upcoming African National Congress (ANC) conference, plays a significant role in ratings decisions.

Tax Revenue Analysis

Tax Buoyancy and Performance

• Underperformance: Tax revenue growth in the first five months of FY17/18 was only 3.4% y/y, half the rate of FY16/17.
• Components of Underperformance: Weak personal income tax (PIT), customs, excise, and fuel levy collections contributed to the revenue shortfall.
• Nominal vs Real Buoyancy: The Treasury and SARS use nominal measures for tax buoyancy, but real measures generally outperform nominal ones. The real tax buoyancy ratio averaged 1.8, while the nominal ratio averaged 1.1.
• TRCI (Tax Revenue Conditions Index): The index, based on seven components, indicates that tax conditions are at their lowest since 2009. The largest weights are assigned to compensation of employees, GDP deflator, gross domestic expenditure, and gross operating surplus.

Tax Stability

• Resilience: Despite weaker economic conditions, tax stability has improved since 2013, with the coefficient of variation (CV) for total revenue at 8.5%.
• PIT Volatility: Personal income tax stability has deteriorated significantly, with a CV of 11.3%, due to wage fluctuations and changes in tax policy.
• CIT and VAT Stability: Corporate income tax (CIT) and value-added tax (VAT) have shown greater stability, with VAT being particularly resilient.
• Comparisons with Peers: South Africa's tax stability is among the best in emerging markets, with a CV of 8.5% compared to peers like Indonesia, China, and Brazil.

Public Spending and Deficit Outlook

• Expenditure Ceiling: The Treasury has maintained a strict ceiling on non-interest spending, which has been reduced over time.
• Public Sector Wage Bill: The wage bill accounts for 40% of non-interest expenditure, and the Treasury has managed to reduce it by 16% in real terms since 2015.
• Deficit Deterioration: The main budget deficit is expected to worsen by 0.6pp to 4.1% of GDP in FY17/18, with a cumulative revenue undershoot of ZAR 75bn over three years.
• Debt Levels: The gross debt-to-GDP ratio is projected to rise above 53% in the next two years, necessitating increased bond issuance.

Contingency Reserves and SOE Funding

• Contingency Reserves: The Treasury's contingency reserves have been significantly depleted, with ZAR 6bn already used for SOE support, and more likely to be needed in future years.
• SOE Support: SOEs such as SAA and Eskom are expected to require further capital injections, which will continue to strain the budget.

Risk Factors

• Contingent Liabilities: The government's balance sheet carries a significant contingent liability risk, particularly from SOEs and their debt obligations.
• Eskom Risk: Eskom remains a major financial risk due to its reliance on state guarantees and pricing agreements with independent power producers.
• Ratings Outlook: The country's local-currency sovereign debt is expected to slip into high-yield by mid-2018, with S&P likely to downgrade the rating by June 2018.

Structural and Policy Considerations

• Fiscal Policy: The Treasury is expected to continue its counter-cyclical fiscal policy stance, focusing on infrastructure and socio-economic transformation.
• Deficit Management: The government may need to reprioritize spending, particularly in economic-related sectors, to manage the deficit.
• Political Factors: The outcome of the ANC's national elective conference in December 2017 will be crucial for improving political certainty and potentially delaying ratings downgrades.

Conclusion

• Fiscal Challenges: South Africa's fiscal situation remains challenging, with weak revenue performance, increased SOE financial burdens, and the risk of further ratings downgrades.
• Policy Response: The Treasury must balance fiscal discipline with the need to support SOEs and manage public sector wage costs.
• Long-Term Outlook: The country's structural economic challenges and contingent liabilities suggest that the credit rating will likely fall below investment grade by mid-2018, unless significant reforms and fiscal discipline are achieved.