EMERGING MARKETS RESEARCH
23 February 2012
SOUTH AFRICA: 2012 NATIONAL BUDGET
Might lower deficits still mean higher yields?
UPDATE: This replaces the version sent earlier to correct the Treasury’s forecasts for the
budget deficit in FY12/13 and FY14/15 as noted in the last sentence of the first paragraph.
Gina Schoeman
+27 11 895 5403
[email protected]
„
„
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Treasury reduced its deficit forecasts through FY14/15 despite a weaker economic
environment as new taxes were introduced and loopholes were closed, while fresh
expenditures were largely offset by spending efficiencies elsewhere. On a main
budget basis, the deficits are now projected at 5.2% for FY11/12 (-0.5%), 5.2% for
12/13 (-0.3%), 4.4% for 13/14 (-0.4%) and 3.6% for 14/15 (-0.1%).
Financial services the focus for tax policy changes. A dividend withholding tax was
introduced, capital gains taxes increased, new tax-preferred savings and investment
accounts discussed, a withholding tax on foreign investors receiving royalties or
dividends was announced and the elimination of the broker exemption to the
securities transaction tax was removed. Loopholes in some other areas were closed.
SOE infrastructure push affirmed, with an expected spend of R677bn over the
forecast horizon and an expected issuance need of R297bn. Questions over the
political willingness to support a “user pay” model for infrastructure financing may
cloud the sector’s outlook, however.
Despite the lower government deficit estimates, issuance plans for the local market
are little changed and imply a further net R445bn to be issued into the local bond
market through FY14/15. A push to switch the R189/R206 and R201 into longer
maturities and the announcement of a new 2048 nominal stock and 2049 inflation
stock suggest that long-dated issuance is likely to weigh on the market and we
expect curve steepening, particularly beyond 5y.
Figure 1: Medium-term fiscal outlook
February main budget deficit (%GDP) - rhs
MTBPS estimate - rhs
Govt net debt (%GDP) - lhs
+ Provisions / contingencies - lhs
55
8
50
7
45
6
5
40
4
35
3
30
2
25
1
20
0
08/09
09/10
10/11
11/12
12/13
13/14
14/15
Note: Dates are Fiscal Year. Source: National Treasury, Absa Capital
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 12
Absa Capital is a division of Absa Bank Limited
Jeffrey Schultz
+27 11 895 5349
[email protected]
Jeff Gable
+27 11 895 5368
[email protected]
Divya Vasant
+27 11 895 5345
[email protected]
www.barcap.com
Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
Narrower budget deficits via a bump up in revenues
Macro economic projections have deteriorated
National Treasury has revised its
real GDP forecasts down
But a higher deflator helps
mitigate weaker real growth on
nominal GDP estimates
The budget process is intimately linked to the macro environment, particularly as South
Africa has looked to allow the automatic stabilisers in the budget to produce countercyclical policy during the slow post-recession economic recovery. When setting out the
2012 Budget and Medium-Term Expenditure Framework (MTEF), National Treasury noted a
“high degree of risk clouding the global outlook” Largely in line with consensus, the real
GDP growth assumptions were cut 0.7pp, 0.5pp and 0.1pp for 2012, 2013 and 2014,
respectively. Similar to our medium-term growth trajectory, 2012 is expected to be the low
point for economic growth. Thereafter, the economy is expected to improve alongside a
healthier global backdrop.
For inflation, Treasury pushed its 2012 inflation forecasts higher, mostly on the back of
higher food prices, rising administered prices and a weaker currency. Interestingly, its CPI
estimates for the outer years were revised down marginally and Treasury believes that
inflation will be back within the target band by next year (remaining within the band
through the remainder of the forecast period). The estimates of the GDP deflator have
increased through the period, helping to mitigate some of the weaker real growth profile on
the estimates on nominal GDP. Still, in nominal terms, Treasury now expects that the
economy will be some 0.6% smaller in FY12/13 than it has estimated in the October
MTBPS, and in FY14/15 0.1% less.
Figure 2: Macro economic projections – National Treasury versus Absa Capital
(%)
Real GDP
Nom GDP (Rbn)
Nom GDP
CPI
Oct 2011 MTBPS
3.1
2,932
10.0
5.0
Budget '12
3.1
2,941
10.5
5.0
AbCap
3.1
2,960
11.2
5.0
Oct 2011 MTBPS
3.4
3,208
9.4
5.4
Budget '12
2.7
3,204
8.9
6.2
AbCap
2.8
3,278
10.7
6.5
4.1
3,555
10.8
5.6
2011
2012
2013
Oct 2011 MTBPS
Budget '12
3.6
3,526
10.0
5.3
AbCap
3.8
3,630
10.7
5.7
Oct 2011 MTBPS
4.3
3,931
10.6
5.4
Budget '12
4.2
3,897
10.5
5.1
AbCap
4.1
4,029
11.0
5.3
2014
Source: National Treasury, Absa Capital
23 February 2012
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Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
Despite a poorer macro outlook deficits are projected smaller
Lower budget deficits were
made possible despite lower
nominal GDP projections
This was mostly the result of
higher revenue projections
owing to increased taxation
Against lower nominal GDP growth projections, Treasury still managed to deliver a budget
of lower deficits via higher revenue estimates and largely unchanged expenditure plans.
For our budget discussion, we prefer focusing on the main budget (as opposed to the
consolidated) as it translates better into the Treasury's financing requirements. In this
respect, the main budget deficit was cut back by 0.5% of GDP for FY11/12 (to 5.2%), 0.3%
for FY12/13 (to 5.2%), 0.4% for FY13/14 (to 4.4%) and 0.1% for FY14/15 (to 3.6%),
compared with October’s MTBPS estimates.
The key reason to higher revenue projections comes down to increased taxation (Capital Gains
Tax and indirect taxes such as a fuel levy and the usual ‘sin taxes’). And while expenditure
remains relatively unchanged, a distinct reallocation of funds to priority areas is clear.
Revenues ramp up as taxation climbs
National Treasury has managed to bump up its revenue projections in the order of R15.6bn,
R13.3bn and R12.3bn for FY11/12, FY12/13 and FY13/14, respectively. For FY14/15, the
main budget revenue details have been revealed and revenues are projected to pick up to
24.9% of GDP from 24.5% in the current fiscal year.
Revenues are expected to
increase to 24.9% of GDP
(24.5% currently)
For FY11/12, the upward revision to revenues was primarily put down to the fact that
corporate tax revenue expectations have improved and are now expected to come in at
R152bn, R8bn higher than budgeted at the MTBPS. That said, personal income tax revenue
has been revised down by R3.1bn.
Looking at the outer years of the budget forecast, Treasury continues to estimate higher
revenue collection than had been expected in October, even though the economy is
expected to be somewhat smaller than had been projected at the time of the MTBPS.
According to Treasury, this is made possible through the combination of additional taxes
and an increased efficiency in tax collection.
Figure 3: National Treasury main budget balance projections – National Budget (February 2011) versus MTBPS (October 2012)
Financial year
Budget
Change from October 2011 MTBPS (ZARbn)
(Rbn)
11/12
12/13
13/14
14/15
11/12
12/13
13/14
14/15
Revenue
734.6
799.3
894.3
997.2
15.6
13.3
12.3
-
Expenditure
-891.2
-969.4
-1053.8
-1139.6
3.2
2.4
-3.2
-
Budget deficit
-156.6
-170.0
-159.5
-142.4
18.7
15.7
9.1
8.1
Financial year
% GDP
Budget
11/12
12/13
Change from Oct '11 MTBPS
13/14
14/15
11/12
12/13
13/14
14/15
Revenue
24.5%
24.2%
24.7%
24.9%
0.4%
0.4%
0.5%
-
Expenditure
29.8%
29.4%
29.1%
28.5%
-0.1%
0.1%
0.1%
-
Budget deficit
5.2%
5.2%
4.4%
3.6%
-0.4%
-0.3%
-0.4%
-0.1%
Source: National Treasury, Absa Capital
Higher dividend withholding tax,
CGT and indirect taxes allow for
strong revenue projections
23 February 2012
The February 2012 Budget announced additional tax revenue streams through a dividend
withholding tax, increased capital gains tax and higher indirect taxes (fuel levy, electricity
levy and the usual sin taxes). For the former, the dividend withholding tax will be introduced
at a rate of 15% (the Secondary Tax on Companies, which it replaces, was at a rate of 10%).
The effective capital gains tax rate will be increased to 13.3% for individuals and 18.6% for
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Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
companies (from 10.0% and 14.0%, respectively). For indirect taxes, the general fuel levy
and Road Accident Fund (RAF) levy will increase 20 cents/litre and 8 cents/litre,
respectively (effective 4 April 2012), while the electricity levy rises by 1 cent/kWh (to
3.5 cents/kWh). Sin taxes – cigarettes and spirits mostly – see nominal gains of 5.95% and
20.0%, respectively. Together, these tax streams will bring in an estimated R15.8bn and
after taking into account tax relief (mostly in the form of income tax ‘bracket creep’ and the
abolition of STC) explains most of the R13.3bn upward revision to FY12/13 revenues.
Over the medium-term, personal
income tax will provide the
biggest boost to higher revenue
projections
For FY13/14 and FY14/15, revenues as a percentage of GDP continues to rise, as the
economic recovery gains pace. The bulk of the increase is budgeted to come from personal
income tax where the tax take climbs from 8.3% of GDP currently to 9.4% by FY14/15. This
suggests an expectation for employment growth. All other categories remain relatively flat
relative to GDP through the period.
BOX: Financial services in the tax spotlight
Of the changes in tax policy contained in the February budget, the most striking focus
is on what we would loosely term “financial services”. Key initiatives include:
Implementation of dividend withholding tax from 1 April. Earlier budgets had notified
an intention to do away with the Secondary Tax on Companies (STC), wherein an
additional 10% tax was levied at the company level on dividend payments, with a more
orthodox withholding tax levied on the individual. What was a greater surprise is that
the withholding tax is to be levied at 15% and not at the 10% of the tax it replaced.
Increase in the capital gains tax from 1 March. For individuals and special trusts, the
inclusion rate rises from 25% to 33%, yielding a climb in the maximum effective
capital gains tax to 13.3% from 10%. For other entities the inclusion rate increases
from 50% to 66.6%, yielding an effective rate for companies of 18.6% and for other
trusts a rise to 26.7%, both a third higher than before. Capital gains exemptions
thresholds have also been increased.
The introduction of tax-preferred savings and investment accounts, with aggregate
annual contribution caps of R30k and a lifetime limit of R500k. No more details yet,
but a discussion document is to be released by May 2012 and an implementation date
of April 2014 is targeted
Withholding tax for foreign investors receiving royalties or dividends, beginning in
2013 and at a rate of 15%, subject to tax treaty exemptions.
Changes to the securities transaction tax whereby the current exemption for brokers
who acquire shares for their own benefit will fall away from April 2013. Currently,
South Africa’s 0.25% securities transfer tax is not faced by brokers.
23 February 2012
4
Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
Figure 4: Revenue estimates as per National Budget February 2012
(Rbn)
% GDP
Fiscal year
10/11
11/12
12/13
13/14
14/15
10/11
11/12
12/13
13/14
14/15
PIT
226.9
249.7
286.0
328.4
377.7
8.2%
8.3%
8.7%
9.1%
9.4%
CIT
132.9
152.0
167.8
183.2
202.2
4.8%
5.1%
5.1%
5.1%
5.1%
VAT
183.6
190.8
209.7
231.7
256.0
6.7%
6.4%
6.4%
6.4%
6.4%
Other
130.8
146.2
162.9
170.3
183.8
4.7%
4.9%
4.9%
4.7%
4.6%
Gross tax revenue
674.2
738.7
826.4
913.6
1019.6
24.5%
24.7%
25.0%
25.2%
25.5%
Dept revenue & royalties
13.5
17.6
15.1
17.9
19.0
0.5%
0.6%
0.5%
0.5%
0.5%
SACU pmts
-17.9
-21.8
-42.2
-37.2
-41.4
-0.7%
-0.7%
-1.3%
-1.0%
-1.0%
Total revenue
669.7
734.6
799.3
894.3
997.2
24.3%
24.5%
24.2%
24.7%
24.9%
Source: National Treasury, Absa Capital
Expenditure relatively unchanged but efficiency set to improve
Only small changes were
announced on expenditure
Closer inspection shows that
current expenditure has been
reallocated significantly
In terms of absolute top-line rand levels, National Treasury announced only small changes
to its expenditure projections over the medium-term forecast period, compared with the
October baseline, increasing expenditure by R3.2bn and R2.4bn in FY11/12 and FY12/13,
respectively, and bringing its FY13/14 estimate down by R3.2bn. By the end of the forecast
period in FY14/15, spending amounts to R1.1trn (28.5% of GDP).
In the detail, Treasury has been hard at work to improve the efficiency of spend to redirect
expenditure to priority areas. This has allowed R55.9bn in expenditure to be reprioritised
over the next three years. And in line with its policy stance of shifting spend toward
infrastructure and employment creation.
For job creation, an additional R4.8bn bumps the expanded public works programme to a
total R77.8bn over the medium term, with the hope that this enables an additional 500k
jobs to be created by FY14/15. Education is already a very large category of government
expenditure and, as a result, the key is not to spend more but to spend it more effectively.
The budget reiterates the need to improve the quality of education. While the health sector
receives an additional allocation of R12.3bn over the next three fiscal years, most of this will
be to improve the quality of public sector health services and infrastructure. Only R1bn goes
toward national health insurance and only in the form of pilot projects across 10 districts.
This is not new and was announced as an initiative in the MTBPS. Helpful to low-income
individuals, social assistance will increase by R17.8bn by FY14/15 with the number of social
grant beneficiaries lifting to 16.8mn (from 15.6mn currently).
Infrastructure receives the
largest reallocation of current
spend
All eyes are on the public sector
wage bill, given the ramp up in
compensation of employees as a
% of GDP
23 February 2012
Infrastructure will see the greatest reallocation of spend and as much as R14bn will be deployed
over the next three years. The Passenger Rail Agency of South Africa will see R4bn in FY14/15,
Eskom’s electricity demand-side management grant means R4.7bn over three years while
repair to flood-damaged infrastructure will total R3.1bn over the same period. Finally, economic
support in the form of special economic zones (SEZ) receives R2.3bn while a manufacturing
competitiveness enhancement programme receives a further R5.7bn.
As the largest component of current expenditure, the public sector wage bill is being
watched closely due to the extent of its increase in recent years and Treasury’s assertion
that wages would only grow at a cost-of-living adjustment of 5.0% for each of the next
three years. For the current fiscal year, Treasury estimates that R346.7bn will be spent on
compensation of employees but critically, as a share of expenditure, its proportion will fall
over time. This aligns with the shift to social and economic spending priorities.
5
Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
Figure 5: Compensation of employees as a % of expenditure
38
Compensation as % of expenditure
37
Treasury forec ast
36
35
34
33
32
31
30
2014/15
2013/14
2012/13
2011/12
2010/11
2009/10
2008/09
2007/08
2006/07
2005/06
2004/05
2003/04
2002/03
2001/02
2000/01
29
Fiscal Year
Source: National Treasury, Absa Capital
We think budget deficits may deteriorate more than Treasury expects
We see downside risks to
Treasury’s budget estimates but
mostly because of
implementation, not because of
the macro backdrop
Controlling the public sector
wage bill is critical over the
medium-term
In our budget preview piece, we believed that Treasury would need to announce a higher
deficit path at the February budget, owing to downgrades the macro outlook. By
introducing fresh taxation streams and leaning more heavily on others, Treasury has
managed to change the maths a little, even in a less optimistic economic environment. That
looks commendable to us, and to the extent that our macro figures tend to be somewhat
more budget friendly than Treasury’s (slightly more real growth and inflation), the downside
risks to the Treasury’s budget estimates look more to do with implementation rather than
environment, to our mind.
One critical area will be in controlling the public sector wage bill, something that Treasury
has been particularly poor at during the past fiove years (during which time, the proportion
of non-interest spending taken up by public sector wages has increased from 31.0% in
FY07/08 to 35.7% in FY11/12). The budget is based on wage growth of just 5.0% per year
over the MTEF horizon, which may be a tall order, given the politically-charged environment
in the country.
Infrastructure requirements remain significant, though SOE’s
borrowing requirement is notably lower
With 2012 being declared the year of infrastructure in President Zuma’s state of the nation
address, and considering the increasing speculation with South African society over the
funding models for the infrastructure build program, the budget discussion around the
State Owned Enterprise (SOE) sector deserves particular attention.
Treasury did not meaningfully
adjust spending estimates on
SOE infrastructure
23 February 2012
Over the medium-term, expenditure framework (the next three years to 2015) spending on
SOE infrastructure (“economic services” in the budget’s language) is estimated at R677bn,
which is very close to Treasury’s estimates from the MTBPS. In the detail, a R37bn increase
to transport infrastructure and R16bn to water and sanitation are offset by lower expected
infrastructure spend in the “other” category.
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Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
There is a greater contribution
from internally-generated cash
flows of state corporations to
fund their capital expenditure
programmes
We think this is challenging
given public outcries against
tariff increases
We think it will be difficult to
fund investment from excess
cash
No new government guarantees
to SOEs were announced but a
larger drawdown on existing
Beyond these figures, the story on SOE infrastructure is a little confusing. Despite the large
infrastructure programmes, the Treasury estimates that SOE financing needs will slow over
the MTEF relative to the MTBPS projections Against a SOE capital expenditure requirement
of R616bn, the public enterprises borrowing requirement is estimated at R297bn over the
MTEF. Why is the financing no longer expected to be needed? According to Treasury, a
lower funding requirement “reflects a greater contribution from internally generated cash
flows of state corporations to fund their capital expenditure programmes”.
With strong political support for a “user pay” principle, this would make sense. However, the
current environment looks considerably more challenging, to our mind, particularly given
the recent public rhetoric around the willingness to fund infrastructure projects through
tariff increases. In particular, the Department of Energy has flagged the electricity pricing
policy for review with a downward revision to the electricity tariff path the ultimate goal, in
our view. Within the Department of Transport, cost-recovery mechanisms for road and
aviation infrastructure, which has been pre-funded by SANRAL and ACSA, have come under
increasing pressure and in SANRAL’s case have been revised downward. [SANRAL would
seem to have been given a lifeline in the budget, with balance sheet support of R5.75bn and
the announcement that the Gauteng tolling project would go ahead from April, though at a
reduced base rate of R30c/km instead of the originally budgeted R66c.]
At a more general level, our concern is that declining revenue visibility for infrastructure
providers is likely to make it increasingly challenging to fund substantial investment targets
from excess cash, in our view. While the budget does highlight the need for new regulators
to be established for Water and Transport (to ensure their services are correctly priced), we
are cautious on reading too far into these initiatives which have been a part of various
shareholder department strategies for some time (the Department of Water has been
working on establishing a Water Regulator since 1987).
No new government guarantees to state-owned entities have been announced, though over
the MTEF, Treasury now anticipates a somewhat larger (R34bn) drawdown on existing
guarantees.
guarantees will occur
Figure 6: Public sector infrastructure expenditure and estimates by sector
Budget 2012
Total
Change from MTBPS
10/11
11/12
12/13
13/14
14/15
11/12
12/13
13/14
14/15
147
184
212
228
237
-13.0
-5.8
-0.2
6.9
Energy
52
73
92
100
104
1.0
1.6
1.2
1.3
Water and sanitation
15
22
26
25
25
4.0
5.4
5.1
5.2
Transport and Logistics
69
75
81
89
92
-5.0
4.7
12.1
19.7
Other
42
57
64
71
77
-7.0
-6.7
-3.1
-3.0
Source: National Treasury, Absa Capital
Issuance
Lower budget deficits and
modest SOE borrowing plans
may appear favourable for bonds
23 February 2012
At first pass, these lower-than-expected budget deficits and more modest borrowing plans
to cover SOE infrastructure spending would appear to be highly favourable for the bond
market. There are some important caveats, however.
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Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
The first of which is that despite the better deficits, in terms of local market financing, the
changes to domestic government bond issuance is actually quite small (and the direction is
up). For FY 11/12, gross issuance rises to R155bn, R5bn higher than October's MTBPS
estimates. For FY 12/13, the estimated issuance is largely unchanged from the MTBPS at
R151bn, and each of FY 13/14 and 14/15 have had about R2bn in issuance added (to R151bn
and R142bn). Looking at it one way, this suggests that the current weekly pace of primary
issuance is likely to be retained for at least the next two fiscal years. But by taking a step back,
the sheer supply call on this market is worth considering. The three years of FY 09/10
through 11/12 will have had a net R472bn in fresh issuance and under the budget FY12/13
through 14/15 projects a further R445bn. This is against a current stock of about R900bn.
But the change to issuance is
small (and the direction is up)
Figure 7: National Government financing plans
Financing of National Government (ZARbn, net)
Change from MTBPS (ZARbn)
Financial years
10/11
11/12
12/13
13/14
14/15
11/12
12/13
13/14
14/15
Borrowing requirement
-133.8
152.7
168.8
158.0
140.9
319.4
350.0
333.7
291.3
Domestic ST loans
34.9
20.8
22.0
22.0
20.0
-1.2
0.0
0.0
0.0
Domestic LT loans
136.9
139.9
120.0
130.4
114.3
4.9
-14.9
-0.9
1.0
Market loans
150.4
155.4
151.4
151.1
142.3
5.0
0.0
1.5
1.5
Redemptions
-13.5
15.5
-31.4
-20.7
-28.0
30.8
-15.0
-2.4
-0.5
Foreign loans
2.8
9.5
-7.5
-3.6
-0.3
11.9
-5.7
0.0
0.1
Market loans
5.2
12.0
4.0
10.6
7.3
12.0
-3.6
2.8
-0.6
Arms procurement loans
0.5
1.0
0.2
0.0
0.0
0.0
0.0
0.0
0.0
Redemptions
-2.8
-3.5
-11.7
-14.2
-7.6
-0.1
-2.0
-2.8
0.7
Chg in cash & other bals
-40.8
-17.6
34.3
9.2
6.9
-29.5
8.2
-16.6
-10.7
Source: National Treasury, Absa Capital
Bonds will face a further three
years of heavy primary issuance
and significant duration
extension
Little change to expected net
T-bill issuance
23 February 2012
The government bond net issuance figures tell only part of the story for the bond market,
however, and the second point to be made is that Treasury appears to target a very large
potential duration increase. As we had highlighted in our budget preview piece of last week,
as Treasury looks to manage its near-term liability profile, it will now turn its attention
beyond the R189 (March 2013, R27bn in consideration) inflation-linked bond, to the R206
(January 2014, R31bn) and R201 (December 2014, R39bn) issues. Against this, there is a
clear signal from Treasury from the new issues previewed by the new budget that the
duration extension witnessed in recent years is likely to accelerate further. In particular,
there are to be new bonds maturing in 2048/49/50 (the new nominal R2048) and
2049/50/51 (a new linker, the RI2050). These will be in addition to a new 2023 nominal
(R2023) and 2025 and 2038 inflation linkers (RI2025 and RI2038, respectively). So not only
will the bond market be facing the weight of a further three years of heavy primary
issuance, but what looks to be a significant duration extension. Add in the SOEs projected
R297bn in issuance (also likely to be at the longer end of the curve, given the nature of the
payback period of the infrastructure projects themselves), and we believe that the last
impact of the budget may be for a steepening of the curve from 5y out on the back of this
large implied duration increase.
Beyond the local government bond market, the new financing plans announce little change to
expected net T-bill issuance (R20-22bn per year), while the profile for hard currency debt
becomes more lumpy (gross issuance of just R4bn in FY 12/13, jumping to R10.6bn in 13/14
and then R7.3bn in 14/15, with net foreign loans registering an outflow of nearly R8.5bn over
the same period as existing obligations mature. Of all of the financing items, it is cash balances
8
Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
that benefit the most from the improved deficit trajectory, with the FY 12/13-FY 14/15
drawdown of balances now reduced to R40bn from R70bn projected in October.
National government debt to
increase to 42.4% of GDP in
14/15 (40.1% currently)
Turning from issuance to debt, Treasury's forecasts for the national government now show an
increase on a gross basis to 42.4% of GDP in 2014/15, against an estimated 40.1%
currently. On an net basis, the figures are a fair bit lower with FY11/12 of 33.3%, rising to
38.5% at the end of the MTEF period. That would be an expansion of about 15% of GDP from
the 2008/9 trough (just as the global financial crisis hit), one of the largest debt increases in
the EM world, and a key reason why Moody’s (in November) and Fitch (January) placed the
sovereign on negative outlook. Broadening the definition of net debt to include provisions and
contingent liabilities pushes this debt figure out to 49.8% of GDP by FY 14/15.
Figure 8: National Government Debt
2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
(Rbn)
Outcome
Estimate
Medium-term estimates
(gross)
553.7
577.0
627
805
990.6
1202.4
1354.901
1693.2
1699.2
(net)
478.4
483.2
525.7
673.2
818.8
997.5
1189.4
1370.7
1537.7
471.1
480.8
529.7
705.5
892.7
1072.9
1247.4
1595.6
1599.9
-75.5
-93.8
-101.3
-106.6
-111.4
-129.4
-109.1
-103.4
-102.2
395.8
387.0
428.4
598.9
781.3
943.5
1138.3
1327.2
1493.4
82.6
96.2
97.3
99.5
97.9
129.5
107.5
97.6
99.3
-
-
-
-25.2
-60.4
-75.5
-56.4
-54.1
-55
Domestic debt
Gross loan debt
Cash balances
Net loan debt
Foreign
Gross loan debt
Cash balances
82.6
96.2
97.3
74.3
37.5
54
51.1
43.5
44.3
Provisions
Net loan debt
44.3
50.5
62.5
58.4
74.4
94.4
97.2
92.8
94.8
Contingent liabilities
185.5
177.1
195.5
267.9
288.6
310.8
338.9
352.6
358.9
o.w. Guarantees
67.8
64.5
63.1
129.1
149.6
170.1
198.6
217.3
228.2
Memo: Debt as a % of GDP
National govt debt (gross)
(net)
National government debt (net) plus
provisions and contingent liabilities
30.2
27.8
27.1
33.0
36.0
40.1
41
42.2
42.4
26.1
23.2
22.7
27.6
29.7
33.3
36
37.8
38.5
39.2
34.4
33.8
40.9
42.9
46.8
49.2
50.1
49.8
Source: National Treasury, Absa Capital
23 February 2012
9
Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
Box: Foreign holdings data show that offshore investors hold 29.1% of
the local government bond market
Since early 2009, many EM countries have seen significant inflows into their local
bond markets as global investors seek the higher yields and relatively stronger public
balance sheets that some EM countries offer. For South Africa, we typically track bond
and equity inflows via the JSE data, but that dataset has several shortcomings, of
which the most critical is that it tracks only flows and not levels. In the budget,
Treasury (through STRATE) provides an important glimpse into just how significant
foreign holdings have become for South Africa. From just over 10% of outstanding
issuance at the end of 2007, and below 14% at end-2009, the last two years have
witnessed a rapid increase to 29.1%. This very large gain in net purchases could not
have come at a better time for National Treasury, given the dramatic rise in primary
issuance over the same period. If domestic bond yields are not to face significant
upward pressure in the issuance periods ahead, it will be important that foreign
participants remain actively engaged in South Africa.
Figure 9: Ownership of domestic government bonds
(%)
2007
2008
2009
2010
2011
Pension funds
47.2
43.9
39.9
36.5
33
Foreign investors
10.6
12.8
13.8
21.8
29.1
Monetary institutions
16.5
18
18.3
17.7
16.3
Insurers
11.6
13.7
12.4
14.1
11.6
Other financial institutions
12.2
10.2
13.2
8.1
8
Other
1.9
1.4
2.4
1.8
2
Source: National Treasury, STRATE, Absa Capital
Policy
Support for industry
The budget provided further detail on the economic support package announced in the
MTBPS. Two key features of this package are to improve manufacturing competitiveness
and to indentify special economic zones (SEZs).
Manufacturing competitiveness
and special economic zones are
part of Treasury’s plans to
support industry
R2.3bn will be spent on the financing of SEZs which essentially replace the Industrial
Development Zones (IDZs). A key weakness of the IDZ clusters was the lack of tax relief
and, as a result, the budget has stated that the government is investigating the possibility of
a reduction in corporate tax for businesses within the selected zones, an income tax
exemption for the operators of SEZs and an additional deduction from taxable income for
the employment of workers earning below a predetermined threshold in SEZs.
R5.8bn will be spent on a manufacturing competitiveness enhancement programme.
Complimenting this, a review of VAT on indirect exports and temporary imports is
underway. Indirect exports of goods by road will be reviewed to make sure exporters are not
prejudiced. VAT on temporary imports will also be reviewed to promote local processing
and beneficiation.
23 February 2012
10
Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
Healthcare and social security
More detail on the NHI reveals a
14-year transition over three
phases
The green paper on National Health Insurance (NHI) released in 2011 stated that the NHI
would (1) improve public health administration, (2) accelerate the hospital revitatilisation
programme and (3) pilot primary health services in 10 districts. Pilot sites will be established
in the 2012/13 financial year and a new conditional grant for this has been provided for
with allocations amounting to ZAR150mn, ZAR350mn and ZAR500mn, respectively, over
the medium-term forecast period. These conditional grants are likely to last five years
before a more permanent funding stream for the new system is established.
On timing, the NHI is proposed as a 14-year “transition” that will take place in three phases.
Detail was only provided on the first phase and here, the NHI will spend five years focusing
on strengthening the public sector in preparation for the new system.
General taxes will be the main
financing to the pilot projects
Over the longer term, the
possibility of a payroll tax or
higher VAT might be
implemented
General taxes will remain the primary financing mechanism for the public health system and
NHI pilot projects but over the longer term, new sources of funding will be necessary. Some
of the financing options mentioned in the document include the possibility of a payroll tax
(payable by employers and employees); a higher VAT rate; surcharges on taxable income; or
a combination of the above.
National Treasury note that an additional revenue source will be needed in 2014/15 to the
tune of ZAR6bn as the NHI preparations become more costly and point out that this is
currently not included in the MTEF. Currently, public sector health spend accounts for
around 4.0% of GDP and Treasury estimate this will increase to around 6.0% by 2025.
Infrastructure
Treasury has acknowledged the
weaknesses in government
infrastructure spending
The major problem is
implementation and measures
are being taken to remedy this
Given that infrastructure is one of the largest spending priorities of Treasury, it was not
surprising that explicit was mention made of the many weaknesses in government‘s
infrastructure capacity. The Finance Minister highlighted that significant spending lags exist
(only R178bn was spent in FY10/11 versus a planned R206bn) and that projects are
typically subject to large cost over-runs. In response, Treasury will be pro-actively
monitoring the allocations to departments and municipalities to ensure accountability.
Treasury already has several measures to improve infrastructure implementation and
capacity, but has also announced some additional support. A Municipal Infrastructure
Support Agency will be established to focus on rural municipalities that lack management
capacity and, in addition, technical support will be provided to municipalities. A
infrastructure skills development grant is planned to support 150 graduate interns in
FY11/12 and, as a result, a further 43 municipalities will be recipients to these skills.
Considering the delays of infrastructure projects, the Construction Industry Development
Board continues to play a key role in developing standard and procedures for government
tenders. Treasury will give special attention to the procurement process for major
infrastructure projects to guarantee value and the support of local suppliers.
23 February 2012
11
Absa Capital, affiliated with Barclays Capital | South Africa: 2012 National Budget
BOX: Why the underspend that is reported on infrastructure does not
show up directly in the budget’s bottom line
Minister Gordhan highlighted the frustration with delays in infrastructure. While long
an issue in South Africa, the minister’s indication that 32% of the 2010/11
infrastructure budget – some R82bn – went unspent helps highlight just how
disappointing the outcomes have been. In the budget, a number of programmes
designed to boost the ability of the state to follow through with infrastructure
programs were discussed, but with one eye to the overall budget deficit and the bond
market, a related question is just what happens to this unspent money? Or, for the
more cynical, are these infrastructure under-runs helping to hide a much weaker
underlying budget performance as unspent infrastructure monies come back into the
fiscus in each accounting year? The answer is yes, and no. Yes, the infrastructure
underspend can find its way back into the fiscus, but no, not to anything like the
amount suggested by the R82bn underspend. The issue is around just where the
underspend lies. For the 2010/11 year (the latest for which data are available, given
the much slower financial reporting cycle of broader government), just R14mn of the
underspend can be accounted for by national departments, and only R19bn by
provincial and local departments, whereas at the other end of the scale, the
underspend at non-financial public enterprises was R57.1bn. For the first group,
unspent money does flow back to Treasury, but for the latter grouping (the SOEs),
infrastructure is funded through their own cash generation and/or fundraising. For
the SOEs, an underspend is not budget cover for Treasury, in other words.
23 February 2012
12
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