Budget tax hikes inevitable, but GDP forecasts may also rise, say analysts

2018-02-21 06:44 - Moeshfieka Botha and Jan Cronje
Sanisha Packirisamy of MMI Investments (Supplied) ~ Supplied

Cape Town - While tax hikes in Wednesday's budget are inevitable, Treasury may announce a healthier projection for 2018's GDP growth rate, according to an analysis by Momentum Investments. 

Meanwhile, all eyes will be on reaction from ratings agency Moody's to see if it keeps SA's sovereign credit ratings a notch above junk, or downgrades SA to non-investment grade. 

In a joint pre-budget report, economist Sanisha Packirisamy and the group's head of investment research and asset allocation, Herman van Papendorp, said Momentum Investments expects real GDP growth to improve to around 1.5% in 2018, from 0.9% in 2017.

This is 0.4% higher that the figure of 1.1% GDP growth for 2018 given by Finance Minister Malusi Gigaba in October 2017 when he delivered the mini-budget. 

"The result of the ANC national conference in December 2017 rekindled hopes for the implementation of growth-enhancing initiatives to shift SA’s growth trajectory to a higher platform over time," said Momentum, adding that  "a sustainable revival in sentiment" was needed to kick-start growth.

A sure thing 

The investment group, like other economists and analysts, said tax increases were inevitable, given that Treasury is facing a revenue hole of roughly R50bn.

Momentum has assigned a high probability to increased fuel levies or VAT on fuel, as well as boosting so-called sin taxes on alcohol and tobacco. 

The sugar tax is a near certainty, while the likelihood of the removal of the medical aid tax credit is "moderate". 

Momentum thought it rather unlikely that Treasury would increase tax on the wealthiest South Africans or up the rate of VAT, however.

How the ratings agencies will react 

Packirisamy and Van Papendorp said that since the ANC's elective conference in December 2017, a number of positive changes had transpired, including attempts to restore good corporate governance at state owned enterprises, an investigation into state capture and upward revisions to growth forecasts. 

"The recent resignation by the former president has raised hopes for a Cabinet reshuffle, which could see the removal of underperforming ministers, including mineral resources, public enterprises, energy and social development," they said. 

Of key concern is the reaction by Moody's to the budget. It is the only major ratings group to still have SA's sovereign debt at investment grade, at one rung above junk status.  

"A downgrade in SA’s local currency rating to junk status by Moody’s would trigger SA’s exclusion from the Citi World Government Bond Index (WGBI), which could prompt significant capital outflows from the SA government bond market," the two economists said. "Estimates of potential outflows range anywhere between R85bn and R130bn."

While Momentum Investments believes there is a "slightly better-than-even chance" for Moody’s to keep SA’s sovereign rating on hold at its upcoming review, it added that "a significant budget disappointment" - such as no clear economic plan to propel growth in the medium term - could trigger a downgrade.

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