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Eskom, SAA to stay drain on tax coffers

Cape Town - Eskom and SAA are likely to continue testing taxpayers' patience while the threat of public sector wage hikes will maintain pressure on SA's ratings outlook.

This is the view of Sanisha Packirisamy, economist at Momentum Asset Management, ahead of Finance Minister Nhlanhla Nene's medium-term budget address on Wednesday.

GDP estimates likely to come down

Packirisamy said fiscal slippage is likely given deterioration in the country's growth outlook.

"Economic conditions, both globally and locally, have deteriorated since National Treasury last published its real gross domestic product growth projections for South Africa of 2.7% in 2014 and 3.2% in 2015." 

So, Treasury is likely to downgrade real GDP estimates for this year closer to the 1.6% consensus forecast, as polled by Reuters, given subdued global trade activity and destructive labour unrest in the domestic mining and manufacturing sectors, she said.

Packirisamy also expects Treasury to further trim its nominal GDP growth projections for 2015, given the impact of the recent retracement in rand oil prices and relatively benign global food prices.

On the tax front, Nene has little room to manoeuvre, she said.

"At this stage revenue projections are tricky to forecast given that December has been a traditionally high-tax intake month, but initial estimates show that higher inflation and a fairly weak exchange rate have supported company tax revenues.  The ongoing recovery of unpaid taxes for high net worth individuals has also benefited personal income taxes on a fiscal year-to-date basis."

She added that VAT and import duties have underperformed on fragile consumption and a slowdown in imports. Furthermore, the seasonal pickup in corporate taxes may prove to be less robust when compared to previous years, given the damaging impact of strike activity that took place earlier this year.  

"While Treasury expected the main budget deficit to remain steady at 4.0% of GDP, the deficit could widen marginally over the medium term relative to February’s forecasts, with South Africa unlikely to reach a deficit smaller than 3.0% of GDP by the 2016/17 financial year," said Packirisamy. 

Likely tax changes

Momentum Asset Management is of the opinion that raising the VAT rate (with an offset to poorer households), would go a long way in generating sufficient revenues to achieve the existing fiscal consolidation path.

"However, VAT hikes are unlikely to be announced at this stage," said Packirisamy. 

She believes likely options that could be hinted at in the mini budget include raising the marginal tax rate for upper-income households or hiking dividend taxes or estate duties, in addition to the usual fuel levies and sin taxes. 

"With nearly half of South Africa’s personal income taxes being funded by a mere 6% of the tax-paying population, the debate between raising personal income taxes for the wealthier as opposed to hiking VAT rates remains contentious," she said. 

READ: 71% of SA wealth in hands of richest 10%
On company taxes Packirisamy said it seems unlikely that they would be increased, given that they are already reasonably high on a global comparison basis. "This would be counter-productive in generating an attractive investment climate."

Carbon taxes, on the other hand, are likely to be introduced in January 2016 and will affect companies on a more indirect basis, she said.  

Wage woes

She said although the government’s commitment to a self-imposed expenditure ceiling has been welcomed by ratings agencies, reprioritisation in expenditure and anti-corruption savings will be imperative to avoid major delays in capital expenditure spend in order to maintain spending limits. 

In addition, South Africa has been through an unsettling year for labour relations, with the mining and manufacturing sector strikes setting the precedent for civil servants.

READ: Unions demand 15% pay hike from government

Given the upcoming expiry of the public sector’s three-year wage deal, negotiated at 7.5% in March next year, all eyes will be on new Minister of Public Service and Administration Collins Chabane's ability to rein in public sector wages. 

"With Treasury only allowing for a 1.0% to 1.5% above-inflation increase over the medium-term expenditure framework, initial demands of 15%, coupled with a more-than-threefold increase in housing allowances and a one-year deal on wages, could potentially see another lengthy strike in the first quarter of 2015 (akin to the 1.3 million public sector worker strike we observed in 2010)." 

Parastatal drain

Packirisamy said Eskom and SAA are likely to continue being a drain of the tax coffers.

"Since Eskom has been unable to generate sufficient revenues to cover the costs of energy supply, the government has stepped in and announced that it would provide Eskom with an equity injection that would likely be funded from ‘leveraging non-strategic government assets’, with an additional debt raising by the utility itself. 

"While this initially implies little direct impact on government’s balance sheet, an increased uptake of guarantees provided would see a further increase in government’s overall debt to GDP ratio," she said, adding that a funding plan for other state-owned corporations, including SAA, would exacerbate South Africa’s debt ratios after accounting for provisions and contingent liabilities.  

Ratings outlook


Although Packirisamy does not expect a further ratings downgrade at this stage from S&P, which has the sovereign on a BBB- rating (stable outlook), reduced fiscal space, the need to accelerate structural reform, prolonged economic weakness and the threat of possibly higher public sector wage settlements will maintain pressure on the country’s ratings outlook over the medium term. 

If the government fails to maintain fiscal discipline and commit to reining in the budget shortfall over the medium term, the ratings outlook by Moody’s (two notches above S&P) and Fitch (one notch above S&P and currently on a negative outlook) could, in all probability, be compromised in the near term, she warned. 


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