South Africa’s finance minister balances fiscal prudence with growth prospects

South Africa’s finance minister balances fiscal prudence with growth prospects

A look at how South African Finance Minister Nhlanhla Nene managed to keep his promise of fiscal prudence, while at the same time preventing austerity from affecting growth prospects.   

Although South Africa’s Finance Minister Nhlanhla Nene (at the start of his media briefing to a record 170 journalists at 11 am on February 25) apologised for presenting a boring budget as he followed through on his promise of fiscal consolidation given in the October 2014 Medium Term Budget Policy Statement (MTBPS), the magic was in the detail as he pulled a 15 billion rand rabbit out of the Unemployment Insurance Fund (UIF) hat by cutting the required contribution to the UIF by that amount. This was not highlighted in the Budget Highlights sheet given out by the National Treasury. Instead, some people were fixated on the 1 percentage point increase in personal tax rates and the 30.5 c/l rise in the fuel levy.

The table below shows how the magician-esque Nene was able to meet his promise of fiscal prudence by raising taxes, but not to the extent that it would harm growth.

Note that the sub-total reflects the amount that goes through the Treasury and is reflected in the fiscal deficit, while both the UIF and Road Accident Fund are off-balance sheet items, even though it is Treasury that determines their funding. The amount of fiscal tightening from tax changes is thus 8.716 billion rand or 0.2 percent of expected GDP, while the net impact is a mere 0.09 percent.

The elephant in the room was the electricity supply crunch that led to 19 days of load shedding in February as shown below.

This is one of the reasons why the GDP growth forecast for this year has been slashed from 3.2 percent expected in the February 2014 budget to only 2.0 percent in the February 2015 budget. Treasury estimates that the lack of electricity supply reduces GDP growth by between 0.3 and 0.6 percentage points or 12 billion rand to 24 billion rand.

A look at the detail of the Treasury GDP projections, however, seem to indicate that growth will in fact be higher than the 2.0 percent forecast, but final GDP data for 2014 will only be released in March. Treasury expects household consumption expenditure to rise by 2.0 percent this year from 1.6 percent last year, while government expenditure growth is expected to ease to 1.6 percent from 1.9 percent. Capital formation will recover from a 0.6 percent decline to a 2.2 percent rise. That results in a 2.4 percent gain in gross domestic expenditure. The volatile foreign trade sector is what pulls down growth and where the greatest forecast error normally arises. Exports are forecast to grow by 3.3 percent, but imports will expand by 4.6 percent.

The rise in capital formation is in part due to the government’s focus on lifting the electricity and logistics constraints caused by its state-owned enterprises as public sector infrastructure spending rises to 274 billion rand in 2015-2016 from 262.4 billion rand in 2014-2015 and only 180 billion rand in 2010-1011. The private sector is also willing to invest despite the constraints with a 9.3 billion rand expansion of a copper mine announced during the week.

The optimism of investors is reflected in the Johannesburg Stock Exchange, which hit new record highs during the week despite the electricity supply constraints and the expected hit to consumer-related shares.

Part of that optimism is due to better than expected GDP growth in the fourth quarter, as growth jumped to 4.1 percent q/q seasonally adjusted and annualised from 2.1 percent in the third quarter.

Only time will tell whether the fourth quarter GDP growth momentum can be maintained in 2015, but Finance Minister Nene has done his best to make that happen.

About Author

Helmo Preuss

Helmo was the chief economist at Oasis Asset Management and former Economics Editor at a real-time financial news service. He holds degrees in Economics, Economic History and Computer Science.