Tax pain favoured by market amid GDP risks

Finance Minister Nhlanhla Nene is looking for taxes he can raise as he seeks to offset weak government revenue.

South African Finance Minister Nhlanhla Nene is looking for taxes he can raise as he seeks to offset weak government revenue and burnish his credibility with investors.

In his first annual budget on Feb. 25, Nene will probably widen his fiscal deficit targets for the next two years, according to the median estimate of eight economists surveyed by Bloomberg. By fulfilling an October pledge to curb spending, he may alleviate some of the risk expressed by ratings companies and traders, who have sent prices of credit default swaps 26 basis points higher than the average over the past five years.

His challenge will be to find new sources of revenue that won’t unduly impair the economy, which is struggling to gain momentum after the worst year for growth since the 2009 recession. Nene, 56, may announce increased levies including fuel surcharges, aiming to preserve the nation’s investment- grade status and boost the allure of the country’s assets.

“It will be a pretty fine balancing act,” Asher Lipson, head of fixed-income strategy at Standard Bank Group Ltd., said by phone from Johannesburg on Feb. 20. “They’ve got to find taxes that will not be too punitive to the economy. But ultimately tax increases as opposed to debt issuance would be far more positive for the bond market.”

Fuel Levies

The budget deficit will probably reach 3.7 percent of gross domestic product in the year through March 2016 and 3.1 percent in the year after that, according to a Bloomberg survey. That compares with National Treasury projections of 3.6 percent and 2.6 percent, respectively.

Analysts are divided on which taxes Nene will increase to raise an extra 12 billion rand ($1 billion) he proposed in the Oct. 22 mid-term budget. A 28 percent drop in gasoline prices in the past six months, following a slide in global crude costs, may give authorities room to raise fuel duties.

“You may see a combination of tax increases,” Andrew Wellsted, the South African head of tax at law firm Norton Rose Fulbright, told reporters in Johannesburg on Feb. 17. “Any tax increase is going to have some negative effects on the economy.”

Rating Downgrades

Nene is seeking to preserve the nation’s credit rating after two downgrades last year. Fitch Ratings said in December the government’s fiscal tightening plans should help curb debt, allowing it to keep the assessment at BBB, the second-lowest investment grade. That’s in line with Moody’s Investors Service, which downgraded South Africa a week after the mid-term budget, and one level above Standard & Poor’s.

The rand gained 0.1 percent to 11.6620 against the dollar as of 4:50 p.m. in Johannesburg on Feb. 20, taking its decline since the October fiscal statement to 5.7 percent. Yields on government rand bonds due December 2026 rose seven basis points to 7.66 percent on Friday.

If Nene sticks to his plans to raise revenue “in the short term, it’s clearly likely to be positive,” Alex Smith, an economist at First National Bank, a unit of FirstRand Ltd., said by phone from Johannesburg on Feb. 20. Rating companies “would want to see that those revenue measures are sustainable and also that they are likely to not result in any significant adverse effect on longer-term” gross domestic product growth, he said.

Debt Levels

Nene may trim his economic growth forecast of 2.5 percent for this year as power blackouts in Africa’s most-industrialized economy disrupt output. GDP will probably expand 2.3 percent this year and 2.5 percent in 2016, according to the median estimate of 22 economists surveyed by Bloomberg. That compares with estimated growth of 1.4 percent in 2014, according to the Reserve Bank.

Investors are monitoring Nene’s plan for signs of rising debt levels. While the finance minister projected gross government debt will increase to 49.8 percent of GDP in 2018, revisions to the national accounts data in November may have lowered the ratio to 47.6 percent, according to the central bank.

Rising debt “might jeopardize the ratings for South Africa,” Martin Marinov, an emerging-markets money manager at Raiffeisen Kapitalanlage in Vienna, said by phone on Feb. 19. “They have to raise the revenue, so I think there’s going to be some kind of tax increase coming.”

©2015 Bloomberg News

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