Budget reform has made the government’s tax and spending plans so predictable that markets now tend to react to the annual Medium Term Budget Policy Statement with a yawn. But the private sector is hoping that Minister of Finance Trevor Manuel will spice up his speech today with an announcement on foreign exchange regulations.
“There is high event-risk in terms of an easing of foreign exchange regulations.” That’s market jargon, courtesy of Standard Bank’s chief economist Goolam Ballim, for speculation that Manuel will announce the removal of restrictions on offshore investment by South Africans.
A rumour has been circulating that Manuel may abandon his gradual approach to dismantling exchange controls in a bid to weaken the rand. However, few economists believe he will opportunistically remove restrictions, and there is no consensus that even a “big bang” end to restrictions on capital movement would necessarily have that effect. Goldman Sachs, the merchant bank, has argued that it would have the reverse effect, increasing confidence and encouraging capital inflows.
One economist who has worked closely with the National Treasury said Manuel wouldn’t act simply to move the currency. But he conceded that the strong rand created a window of opportunity for change.
“If they do want to move, now is as good a time as we are likely to have. The rand will probably weaken from the second half of next year, so the window is closing, and they may want to take advantage of it now,” he said.
Nedcor chief economist Dennis Dykes agreed, saying the weakening dollar, the likely success of Barclays’ bid for Absa, a probable rating upgrading by Moody’s, and the conclusion of the forex amnesty created ideal conditions for easing.
“We aren’t talking about any change in policy, so the question should be ‘Why not?’ rather than ‘Why?’.”
There may be some short-term weakening of the rand, he says, but the medium to long-term effects are likely to be positive. Even in the short term, the National Treasury may be looking for an opportunity to dampen the currency impact of money repatriated in terms of the forex amnesty.
There appears to be consensus that the broad economic outlines of Manuel’s three-year Medium Term Expenditure framework will remain substantially unchanged from the modestly expansionary approach set out in February’s Budget.
Revenues are flowing in strongly as economic growth accelerates, and Manuel should provide some information on the expected proceeds of the foreign exchange amnesty.
There is still uncertainty about corporate taxes, which have been hurt by the strong rand. But even if they come in higher than expected, the medium term expenditure framework is expected to reflect what Ballim describes as a “refinement in fiscal stability”.
“Investment in infrastructure has three times more impact on gross domestic product growth than tax cuts,” he points out.
Social spending — particularly on grants — has consistently grown faster than expectations in recent years, and a substantial portion of any tax windfall will be directed there. The rest will probably go into infrastructure investments both in services like health and education, and in economic infrastructure.
This means the projected budget deficit of 3,1% of gross domestic product (GDP) for the current fiscal year is unlikely to be revised, even as spending increases.
If this is the case, an expanding social wage and improved eco- nomic infrastructure should help to spur economic growth without hurting crucial fiscal ratios like deficit to GDP, and debt to GDP.
The 2004 Budget Review pencilled in growth of 4% for 2005/06, a number economists described at the time as optimistic. However, with the economy expanding at about 4% annually at present, and a pending revision in GDP figures from Statistics South Africa that could add as much as 0,5% to the growth rate, the projection now looks less ambitious.
Nevertheless, Ballim reckons that, on the basis of current figures, growth next year will come in closer to 3,5%.
The impact of the Stats SA revisions will be clearer in next February’s budget. And it is only then that Manuel will make concrete announcements on changes in the tax regime. Meanwhile budget-watchers — mindful of his emphasis in recent speeches on the importance of improved household saving — will be looking for clues to possible revisions in the widely criticised tax on retirement funds, a clampdown on travel allowance abuse, and progress on a highly controversial proposal to review the way gold mines are taxed.
“The government’s capacity to stimulate the economy in a long-term, meaningful, sustainable way will be the key message,” Ballim said.