/ 20 February 2008

Manuel’s budget: Mediocre or historic?

Overwhelmingly positive or mediocre? Economists on Wednesday had a variety of impressions to share of Finance Minister Trevor Manuel’s national budget, tabled in Parliament earlier in the day.

Colen Garrow, economist at Brait, said: “I think it was very mediocre. There was nothing in it for the embattled consumer who is being battered by fuel levies, cost-of-living increases et cetera.

“It was also disappointing that the GDP estimates were lowered, especially when you have to battle with our opponents growing more aggressively. It is questionable that we run a moderate surplus when we should be running a moderate deficit when world economies are slowing.

“So, it was somewhat disappointing that it wasn’t more pro-GDP growth. I feel more could have been done. The corporate tax news was good, but there could have been more for the consumer.”

The corporate tax rate was dropped to 28% from 29%.

“There was nothing earth shattering in this budget — it was just another round of prudent fiscal policy being implemented,” said George Glynos, economist at ETM. “I am surprised the growth forecast is as high as it is, and that the inflation forecast is as low as it is. Still, the expected surplus going forward also surprises me a bit.

“I suppose at end of the day there is nothing that really excited me — it was just another round of prudent fiscal policy. The minister has moved to allay fears [among foreign investors] that the economy is in trouble and that South Africa, as a country, is incapable of looking after itself — although it’s not being reflected by the market reaction.

“The exchange-controls announcement was a bit of a surprise, but the rand’s weakness cannot be solely attributed to that — there are a number of other factors at play today, including a sharply weaker euro and weaker emerging markets.”

A key feature of the budget was the lifting of exchange controls on institutional investors.

The rand was more than 3% weaker against the dollar in late trade on Wednesday after Manuel’s Budget speech. It weakened to a 16-month worst level of R7,9225 against the dollar — after closing at R7,6625 on Tuesday — with traders predicting the local currency could break above the R8-per-dollar level overnight.

Traders said it was difficult to pinpoint the exact reason for the rand’s fall, but said it could be attributable to concerns over how the government plans to finance a widening current-account deficit.

On the upside …

Razia Khan, regional head of research: Africa at Standard Chartered Bank, was more upbeat about Manuel’s budget.

“Never underestimate the capacity to surprise! In every way that matters, this budget delivered an overwhelmingly positive surprise — whether it’s the stated intention for the budget to remain in surplus over the foreseeable future, the announcement of the cut in the corporate tax rate, or the long-awaited move away from exchange controls for institutions in favour of prudential regulations.

“Given the difficult situation that South Africa now finds itself in, we were bracing ourselves for the worst — instead we have an incredibly positive budget, one that is likely to take on great historic significance.

“The knee-jerk market reaction is therefore decidedly curious. Yes, there may be concerns that the downgrades to growth forecasts do not go far enough.

“Our own forecast for South African growth in 2008 is a full percentage point below the Treasury’s 4% — and this may have implications for the amount of revenue collection going forward. Also, while there may not be increased bond issuance from the central government, we expect to see greater issuance from Eskom and Transnet, which may be tempering some of the optimism.

“It may be that the market also needs time to digest the implications of the planned support for Eskom — through subordinated loans — therefore having little fiscal impact compared with, say, a direct cash injection. The projections for the current-account deficit are, however, realistic — staying high this year, and widening further the next. No one can claim to have been surprised by this.”

The budget did not contain much for the slowing South African residential property market, Absa, the country’s largest mortgage lender, said. Manuel did not announce any further cuts in transfer duty. The maximum value of a property exempted from transfer duty remains R500 000 in the 2008/09 fiscal year.

This is the second straight year in which the government made no changes to the transfer-duty threshold.

Gavin Opperman, managing executive of Absa Home Loans, said a further cut in transfer duty on property had been expected against the background of continued growth in house prices in all segments of the market during the past 12 months.

“There has been a growing realisation that homeownership has become much more broad-based and is an integral part of the household sector in South Africa. This is not expected to change, with past reductions in transfer duty on property having been instrumental to these developments”, he said.

Political views

The Democratic Alliance welcomed the personal and corporate tax relief in the budget, but said the increased tax on fuel will burden businesses.

The party praised Manuel for reducing the tax-compliance burden on small businesses, but said it is disappointed that the secondary tax on companies, now converted to a tax on shareholders, was not cut to below 10%, said DA MP Kobus Marais in a statement.

Marais gave the thumbs-up to the R60-billion in the budget that will help fund Eskom’s infrastructure expansion as well as the R2-billion to promote efficient energy usage. The R10-billion to beef up staff in the police and judiciary is also welcomed.

Marais, however, said the budget is not enough to stimulate growth and job creation in the face of the electricity crisis.

“The minister could perhaps have made allowances for this out of the estimated budget surplus of R18,5-billion for the 2008/09 financial year. In addition, the large surplus could have been used to provide further support to businesses and households that are dealing with the current energy constraints,” he said.

The African National Congress praised Manuel’s budget on Wednesday for its spending on social welfare and public works programmes.

“Particularly welcome are the commitments to equalise the pensionable age for men and women at 60 years and to extend the child-support grant to children up to the age of 15,” the party said in a statement.

The allocation of R60-billion to electricity utility Eskom will help ease the electricity-supply constraints.

“We are … pleased to note that significant allocations have been made in favour of industrial policy. Also critical are the further allocations made in favour of skills development and education,” the ANC said.

The government’s continued roll-out of social and economic infrastructure, including basic services for the poor, is also critical in changing the country for the better. The party said the budget is in line with resolutions on economic growth and job creation taken at its national conference in Polokwane in December last year.

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