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Our budget, your budget, and its impact to financial markets

The commitment by the government to service rising debt is formidable, which will appease rating agencies.

The budget season is upon us once again, where the finance minister tabled a R1.8 trillion budget versus an expenditure of R2.2 trillion. This leaves a deficit of R387 billion. Key issues addressed by this budget speech include, but are not limited to, taxes matters, economic and infrastructural developments, peace and stability, learning and culture, social development as well as debt-service costs.

However, in this budget season, the finance minister finds himself in a dicey economic environment highlighted by a high unemployment rate of 34.9%, sluggish economic growth, high inflationary pressures, draconian effects of the Covid-19 pandemic among other metrics.

Further, this budget speech seeks to provide guidance on debt servicing of about 4.3% of GDP and how the government seeks to arrest cancerous corruption that has rapidly spread across the divide (mostly in state-owned enterprises), which in a way has massively played part in slow economic growth. Additionally, price stability and per capita GDP growth are instrumental for sustainable economic growth, and thus have a ripple effect of deterring deadly civil unrest witnessed in July 2021. About R57 billion was channelled towards the South African Special Risk Insurance Association (Sasria) to help affected businesses.

Notwithstanding the above, revenue collections improved considerably where Sars collected R182 billion more than budgeted, thanks to increases in commodity prices. Furthermore, this budget speech offered massive tax income and tax relief following the drastic effects of the Covid-19 pandemic. Corporate income tax will be reduced from 28% to 27%, this will apply to companies with a year ending on or after March 31 2023. Sin tax hikes were kept in line with inflation (between 4.5%-6%) from above 8% the previous year.

No blanket financial support for state-owned enterprises which has been the norm since 2013. To date, state-owned companies have gobbled a combined R308 billion. Emphasis was placed upon SOEs’ ability to implement stringent cost-cutting measures so as to operate viably and efficiently.

Public spending on infrastructure was hampered by weak economic growth, thus the minister proposed public-private partnerships to improve financing prospects. Though this proposal is noble and anchored on trust, the net proceeds of this proposal are yet to be seen. A huge chunk of government expenditure was directed towards learning and culture, social grant development and healthcare services.

Post-budget speech, the rand remained firm against the dollar oscillating between R15.01 to R15.09. The JSE All Share index remained in the red pre- and post-budget speech trading at 97 bps lower.

In our view, this budget speech addressed key areas highlighted above, however, the implementation side of this, with particular reference to state capture still remain a key issue. Additionally leaving personal taxes untouched is applaudable providing relief to households. The commitment by the government to service rising debt is formidable, which will appease rating agencies despite the modest GDP forecasted growth of  2.1%.

We further express doubt in Treasury’s ability to contain government spending pressures since South Africa has continued to breach expenditure ceilings. Lastly, unemployment remains a tough cookie to bite for the government, we hope to see how the government will boost incentives for youth employment as highlighted in the speech.

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Mauro Forlin

Global & Local Asset Management

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