South Africa on the back foot

South Africa is facing a rough mid-term budget policy statement next week, with macroeconomic forecasts deteriorating since the release of the main budget in February.

However, auditing and consultancy group PwC says that the doom and gloom figures that have been widely publicised over the past few months may be overblown, with more recent data showing a narrower budget deficit on the cards.

But even with a smaller hole in the budget, the group said South Africa is squarely on the back foot: inflation is taking longer to decline, interest rates have increased by more than expected, and GDP growth is slower than initially projected.

“Lower growth is linked to the weak outlook for household finances, which is pressuring consumption spending as well as negative business confidence impacting on capital formation,” it said.

Inflation peaked at 7.8% y-o-y in July 2022. By the time Budget 2023 was released, headline inflation had declined to 6.9% y-o-y, with the National Treasury expecting inflation to average 5.3% during 2023.

However, the headline reading climbed back to 7.1% y-o-y by March and remained outside the South African Reserve Bank (SARB) target range (3%-6%) until May.

More recently, inflation has returned to the SARB’s target range, but it has not settled. In September, inflation ticked up to 5.4% on the back of higher fuel prices – and most economists forecast the 2023 average to be at 5.9% or 6.0%.

Several factors contributed to higher-than-expected inflation, including rand weakness: still-elevated global food price inflation, larger-than-expected fuel price increases, and the adverse effect of load-shedding on supply chains.

“This has resulted in slower disinflation — the decline in monthly y-o-y readings — compared to what many analysts were expecting earlier this year,” PwC said.

Unsurprisingly, the SARB responded to this environment with monetary policy moves, lifting interest rates by a cumulative 125 basis points in 2023 – about 50 bps more than many economists had anticipated at the start of the year.

“This, in turn, has negatively impacted the broader economy,” the group said.

While rates have been on hold since July, the uptick in inflation has some economists projecting another possible hike in November, although views are split between that and another hold.

On top of inflation and interest rates, however, South Africa’s economy is also dealing with negatives elsewhere.

Business confidence has not been enough to encourage investment, PwC said; meanwhile, the country’s trade surplus has shrunk from R161 billion in 2022 to R32 billion in 2023.

Global commodity prices have declined, tax collections have come in lower, and concerns have been mounting that the country will face a significant revenue shortfall by the end of the financial year.

Overblown

On the revenue front, however, PwC has cautioned against the deeply negative tones, saying that, while the country’s tax collections are likely to be much lower than forecast, it’s still too early in the current financial year to make an accurate call.

In addition, corporate tax collections in August were better than expected, and other revenue sources are holding up – which should narrow the gap.

According to Kyle Mandy, PwC South Africa Tax Policy Leader, the group currently expects a total tax revenue shortfall of up to R30 billion in 2023/2024.

“That is a significant improvement over an earlier prognosis — around R50 billion — following strong collections of Corporate Income Tax in August,” he said.

“The month of August is important for understanding the CIT landscape as it includes the first provisional tax payments for companies with February year-ends.

“Furthermore, collections of Personal Income Tax are holding up well, and will likely be around R10 billion above Budget 2023 estimates, on the back of stronger-than-expected job creation and wage growth.”

The more positive outlook for personal income tax is due to the higher than anticipated increases to wages in the public sector, where the government has settled on 7.5% hikes compared to the 3.5% pencilled into the budget.

“A R30 billion tax gap would result in a tax buoyancy ratio of 0.84 in 2023/2024. This would be the lowest reading since the global financial crisis,” Mandy said.

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