South African Reserve Bank file photo
JOHANNESBURG - The SA Reserve Bank (Sarb) has said that its fourth-quarter composite leading business cycle indicator rose to its highest level since 2013, hitting 105.2points, as the mood in the country improved for 2018.

The indicator, a strong pointer for the economic growth prediction for the next six to 12 months, suggested growth might surpass expectations this year, providing some comfort to Finance Minister Malusi Gigaba, expected to walk the tightest fiscal rope in nearly a decade.

Sarb said five of the nine indicator sub-components increased, including building plans passed, the US dollar-based commodity price index, money supply, the volume of orders in manufacturing new passenger vehicle sales and job advertisements.

Annabel Bishop, the chief economist at Investec, said data showed that gross domestic product (GDP) growth could rise above 2percent in the second quarter.

“The positive relationship between business confidence, fixed investment and GDP growth means that South Africa is likely to experience faster economic growth in 2018 than in 2017. President Ramaphosa recognises this relationship,” Bishop said.

The data came as cold comfort to Gigaba, who is expected to plug the R50.8billion revenue shortfall. Gigaba’s Budget is expected to shed light on Ramaphosa’s fiscal path for the country.

Fitch Ratings said the Budget would be an indicator of financing new policies, including free tertiary education for a large share of the population to be introduced this year, and in the medium-term, the planned National Health Insurance.

The agency said that the country’s investments grade status recovery depended on reform of its fiscal policy, public sector reform and the willingness of the South African population to take the pain to achieve it.

FNB chief economist Mamello Matikinca said she expected wide-ranging tax increases as the government seeks to stabilise debt.

“In our view, a one percentage point increase in the Value-Added Tax (VAT) rate can no longer be avoided. We calculate than an increase to 15percent could generate as much as R24bn per annum, which would account for the bulk of the heavy lifting,” Matikinca said.

Analysts said that the National Treasury was expected to hike VAT from the current 14percent to stabilise government debt and fend off rating downgrades.

Investec Asset Management co-head of fixed income Nazmeera Moola said South Africa needed at least R45bn to stabilise the fiscal outlook. “With free tertiary education weighing on the fiscus, it would be difficult to achieve the R31bn in expenditure cuts that were planned. At most R15bn is likely. Therefore, tax hikes of around R30bn are needed,” Moola said.

Grow economy

On Friday, Ramaphosa said that his administration would “act decisively” to restore good governance at state-owned enterprises (SOEs) to grow the economy.

Government guarantees and exposure to SOEs pose a significant risk to South Africa’s fiscal position. The exposure increased from R174.6bn in 2015/16 to R218.2bn in 2016/17.

PwC chief economist Lullu Krugel said the Budget had to set in motion tangible plans to achieve Ramaphosa’s ideal of restoring SOEs as drivers of economic growth.

“The finance minister must navigate an intricate balancing act between bailing out SOEs and dealing with credit agencies threatening more rating downgrades. Ideally, SOEs should not require recurring cash injection from the state,” Krugel said.