The mood in the country going into the 2023 National Budget was less than optimistic. Ongoing load shedding, lower forecasted economic growth and a possible greylisting have put a damper on sentiment.
However, Wednesday’s budget offered some reassurances that Treasury and the Finance Ministry are doing something to help address the country’s challenges. Finance Minister, Enoch Godongwana, delivered a prudent budget that provided some sense of certainty.
In case you missed our exclusive webinar with the Deputy Minister of Finance, Dr David Masondo; Citadel Chief Investment Officer, George Herman; and Professor Richard Calland from the Paternoster Group, click on the image below.
OUR VIEW OF THE MAJOR THEMES FROM THE 2023 NATIONAL BUDGET
THE ENERGY CRISIS
In his speech, the Minister noted that the country experienced 207 days of load shedding in 2022, up from 75 days in 2021. He said that government is “acting decisively to bring additional capacity onto the grid,” and added, “We are also working to transform the electricity sector to achieve energy security in the long term.”
One of the most noteworthy solutions that was addressed in the budget, is that government will take over a portion of Eskom’s debt to the amount of R254 billion. The Minister stressed that this relief, however, comes with four strict conditions, which include:
- Requiring Eskom to prioritise capital expenditure in transmission and distribution during the debt-relief period.
- For the company to focus on maintenance of the existing generation fleet to improve availability of electricity.
- That the debt relief be used to settle debt and interest payments only.
- And that Eskom implement the recommendations emanating from an independent assessment of its operations, which has been commissioned by the National Treasury.
Despite the details of the bailout being extremely complex, this move gave markets some much needed assurance that there is, in fact, a plan in place to address the country’s electricity crisis, and the rand strengthened by 20c against the dollar, during the Minister’s speech.
In addition to Eskom’s bailout by Treasury, the Minister also addressed the issue of municipal debt to the beleaguered SOE, noting, “Eskom’s long-term financial viability depends on its customers paying their dues.” As such he said Treasury is exploring ways to address the culture of non-payment by municipalities, organs of state and household customers.
Other measures the budget tabled is a tax rebate on the installation of renewable energy systems. Private households can get a 25% tax rebate back on their solar panel costs, up to a maximum of R15,000 for the upcoming financial year, while businesses will be able to reduce their taxable income by 125% of their cost of investment into renewables for the next two years. To stimulate investment in the short term, the Minister said that there will be no thresholds on the size of the projects.
Over the last two budgets, Treasury has been resolute in its intention to reduce the country’s debt levels and has actively cut expenditure to bring it down. However, today, given Eskom’s woes, Godongwana, noted that government debt will stabilise at a higher level of 73.6% of GDP in the 2025/26 financial year, three years later than laid out in the 2022 Medium Term Budget Policy Statement (MTBPS). This will take government debt from R4.73 trillion in 2022/23 to R5.84 trillion in 2025/26. Debt service costs are projected to reach R397.1 billion in 2025/26 – the enormity of the cost is perhaps clearer when you realise that South Africa is spending over R1 billion per day to service the cost of debt, which is putting huge pressure on South Africa’s fiscus.
The biggest risk associated with the budget is the government’s projected annual growth rate over the next three years. Treasury’s predictions are based on the energy crisis being resolved in the near term. As such, we believe the growth numbers stated in the budget have been overestimated. The Minister noted that the country’s economy grew by an estimated 2.5% in 2022 and has projected that it will grow by an average of 1.4% from 2023 to 2025, which is revised lower from 1.6% in the 2022 MTBPS. We believe this number has not been revised down sufficiently, especially given the assumed 0.9% growth for 2023.
TAX AND PENSION FUNDS
The budget presented no major changes with regards to tax. There were a few positives that will relieve pressure on the taxpayer:
- There was no increase in the Road Accident Fund levy;
- There was no increase in the fuel levy;
- The budget has given citizens R13 billion in personal tax relief via inflation related adjustments to the tax tables;
- The bracket for transfer duty on houses has been increased by 10%, meaning transfer duties would only be applicable on properties valued at R1.1 million, or more.
An important change for our clients that is worth noting is the increase in the tax-free lumpsum benefits from retirement funds, which have gone from R500,000 to R550,000.
There are additional refinements coming to some of the tax laws, but we will keep you updated when and if these will impact you directly.
Godongwana went into some detail about South Africa’s potential greylisting by the Financial Action Task Force (FATF). The announcement is expected to come out late on Friday. In his speech Godongwana said, “We have to prepare for it.” This was an unscripted comment that perhaps says what the Treasury’s expectation is. Godongwana did stress in his speech that government has enacted two new laws to address the technical deficiencies in the legislative framework and that these will address 15 of the 20 legislative deficiencies identified by the FATF. The other five deficiencies will be corrected through regulations and practices, the Minister said. We believe that the biggest challenge South Africa faces, when it comes to being greylisted, is in the implementation of these new laws and regulations.
Where markets reacted favourably to the budget’s plan to assist Eskom, they were spooked by the uncertainty around a potential greylisting, which will make access to international financial services more difficult and borrowing money more expensive.
In summary, we believe that this was a balanced budget, given South Africa’s current challenges, as it addresses both economic and social issues. It is, however, Citadel’s view that it comes with many downside risks. Citadel understands these risks, and our long-term, global investment strategy is designed to ensure your portfolio is well diversified and that your wealth is protected.