Cape Town - The markets’ opinion of Finance Minister Pravin Gordhan’s budget may worsen if any disconnect between the political system and the Treasury emerges, according to NKC Research.
“Over the next few days, the future will become a little clearer, but the (ratings) downgrade remains in the balance if not now then within months,” said analysts Gary van Staden and Bart Stemmet on Thursday.
Rating agency Standard & Poor’s positioned South Africa on the cusp of junk status in December, but said on Thursday they would not downgrade it following the budget speech. However, they said the budget lacked significant policy announcements that will spur GDP growth, or provide enough business confidence to investors.
“If there is the slightest indication that Mr Gordhan does not have the full support and backing of his government colleagues and key elements of the party and the alliance, then all bets are off," said Van Staden and Stemmet.
They said Gordhan did what he could within the limits of his ability to manoeuvre between economic demands and political constraints, and “the deep fundamental economic reforms needed to lift growth levels well above a miserable projection of 0.9% are seemingly out of his hands”.
However, they said he couldn’t address the “disjointed and ideologically hobbled economic policy that is the root of the problem” and fell short in staving off a ratings downgrade.
“The fact that President Jacob Zuma felt moved to announce his support for the budget implies all is not well on the political front, and so does the public tiff between Mr Gordhan and Tom Moyane, the South African Revenue Service (SARS) commissioner,” they said.
When asked why Moyane was absent from the news briefing on Wednesday, Gordhan said: “It’s no secret that there are issues to resolve at SARS. We will resolve them in a couple of weeks and then we will communicate to the public.”
Van Staden and Stemmet said that the “way these issues are resolved – and it is widely understood that the main issue is that Mr Moyane, who is close to Mr Zuma, is resisting taking orders from Treasury – will make a difference to investors’ opinion of the budget’s credibility”.
The rand was trading weaker at R15.67 against the dollar at 07:30, but economist Adam Phillips of Umkhulu said a slight recovery in bonds coupled with global equity being 1% higher overnight means the rand could trade below 15.50 on Friday.
Moving to future tax hikes, Van Staden and Stemmet said that a VAT hike could be on the cards in the near future.
They said South Africans could see a VAT hike, if this clue in the budget review is anything to go by: “The current tax mix suggests that there may be greater room to increase indirect taxes, such as VAT.”
However, Mcebisi Jonas, deputy minister of Finance, told Fin24 on Wednesday that “when you introduce tax (like VAT) … it’s politically sensitive, but more importantly if it’s done in a callous manner it can damage your economy and damage growth.”
Gordhan did not increase personal income tax or VAT (leaving it at 25.6%), concentrating instead on several indirect taxes that will increase the overall tax obligation significantly.