The millennium budget has proved to be a pleasant surprise for foreign and local investors alike, reports Donna Block
Minister of Finance Trevor Manuel should stand up and take a bow. His end of the millennium budget has been a crowd-pleaser in international money circles and foreign analysts are “pleased as punch”.
They were somewhat surprised and see it as a major step forward for South Africa that the company tax rate would be cut to 30% from 35%. This will provide a much-needed impetus for increased foreign direct investment and the overall net result will be a significant improvement in company profits. Investment in South Africa and other emerging markets has been a sensitive issue for the past year, but most analysts are confident that foreign investment will improve in the present environment.
The current combined company tax rate – made up of a corporate tax of 35% and a 12,5% secondary tax on companies – stands at 42,2%, higher than that of many of South Africa’s key trading partners.
Manuel said the new tax dispensation would cut the combined rate to 37,8%, which would fall more in line with other countries.
The finance minister also told Parliament he hoped the lower rate would make South Africa more attractive to domestic and foreign investors and said that in order to sustain growth and job creation it was important that South Africa work toward making the economy more competitive and that an environment be created where small and medium-sized companies can “develop and thrive”.
The cut in company tax will also enhance investment and job creation by not only making South Africa more attractive to foreign investors but by translating into significant cash flow benefits for small and medium-sized companies, thus giving them the ability to play a leading role in job creation and economic development.
According to Mike Schussler of FBC Fidelity Bank, “South Africa will be more attractive to a wider range of investors and will be more likely to attract more and more business.” The rest of the continent also sees South Africa as a strategic position for business ventures .
But analysts also commented that attracting foreigners to set up shop in South Africa was not the only challenge facing the economy. The more formidable task is for South African companies to become global players and that any money which is saved as a result of a smaller tax burden may be used for assistance in training and education.
However, some analysts remained cautious about making too much out of the tax cut, saying issues including South Africa’s infamous crime record would continue to trouble both foreign and local investors.
Manuel failed to provide a hike in real terms in the policing budget which would have contributed to the fight against crime. Crime remains a major obstacle to the South African government’s attempt to attract foreign investment and play down the country’s image as one of the world’s most dangerous places – not helped by the recent murder of the chairman of Daewoo South Africa.
Foreign investors were also gratified to see that electioneering was not a part of Manuel’s budget speech. There was some concern that in the run-up to the elections in May the budget would become a pre-election event or a “hyped” political tool used by the African National Congress to accumulate support. But as one New York specialist commented, the budget is a “a step in the right direction”.
“It’s all very boring but definitely positive, our hats are off to them [the government],” he added.
Although there was some expectation by international investors that remaining exchange controls would be lifted at this time, it was not a major concern to the investment community.
One New York broker said he was actually glad that they weren’t lifted at this time as he doesn’t think South Africa’s markets could “swallow” any more exchange controls.
The budget review states that the government remains committed to the gradual relaxation of exchange controls contingent on macro- economic sustainability.
Foreign money managers are also positive about the pace of privatisation, although they want to see continued improvement in this area. They are also concerned about the low level of domestic savings.However, they are not the only ones. The government is worried about the lack of savings as growth in South Africa continues to be dependent on inflows of foreign capital to supplement domestic savings.
Manuel made a point of addressing this problem in his budget speech and said that the high interest rates “signalled the importance of improving our saving performance, reducing our reliance on foreign capital flows”. However, for the moment “we have to attract foreign investment, making our international relations a key focus of economic policy.
“Our commitment to sound and sustainable economic policies is increasingly recognised as our strength … our investment grade ratings have been confirmed by two international credit rating agencies.”
Manuel said that the global economic conditions of the past year had weighed heavily on the country, saying that “for many, the steep rise in interest rates last year was a sharp reminder that there are both costs and benefits of more open international markets”.
But, nonetheless, he remained committed to reducing the overall burden of debt and a fiscal approach which lowers inflation, “keeping basic goods affordable and protecting the incomes of the poor”.
The global economic turmoil has been felt more severely by other emerging market countries, like Russia and Brazil, who have had trouble maintaining their debt burdens once a crisis broke.
One economist noted that the International Monetary Fund didn’t have to come to South Africa’s rescue during its crisis, and the government’s monetary policy and spending controls have been a benefit to South Africa.
“South Africa has lived through 12 months which were pretty tough,” Manuel said, making reference to the currency crisis which forced interest rates sky-high and brought the country to the precipice of a full-blown recession.
Other countries hit by the same emerging market crisis had been forced to cut spending, but South Africa’s “social service commitments are largely protected”, he said.
Manuel predicted that South Africa’s economy will grow by 1,8% of gross domestic product – which some international fund managers still believe may be wishful thinking – in 1999/2000, compared to a previous estimate of 2%, and the budget deficit will be held to 3,5% versus a revised 3,7% in 1998/1999.
Growth for the period will be well below original forecasts of 3% growth set out a year ago before attacks on the rand forced the Reserve Bank to tighten monetary policy and choke the economy.
Nonetheless, Trev, take a bow.
ENDS