THE WEEK IN PERSPECTIVE

Lisette IJssel de Schepper, with Claire Bisseker

SA Budget week was always going to be eventful, but the happenings on Wednesday were unprecedented. At the very last moment, with virtually all ministers and other delegates already waiting in the Nieuwmeester Dome for the Finance Minister to speak, it was announced that the Budget speech would be postponed to 12 March. Soon, it became clear that a two percentage point (%pt) VAT hike proposal was at the crux of contention among GNU partners, and the decision was made to postpone the Budget rather than table it and risk it not passing.

As we indicated on Wednesday, there are no immediate risks from an economic perspective. Section 29 of the Public Finance Management Act gives some time for a new Budget to be tabled and allows spending to continue until a budget is passed. The initial uncertainty about what caused the 11th-hour delay and what it would mean for the way forward led to a depreciation of the rand exchange rate, while bond yields ticked up. Both have recovered since, with the rand actually trading stronger than pre-budget levels by yesterday afternoon. The 10-year government bond yield was still somewhat higher by Thursday close relative to last week.

It will be a daunting task to put together a ‘new’ Budget by 12 March, especially one that would appease all GNU partners – but it makes sense that their input should be considered. Indeed, the postponement in itself is seen by many (including the GNU parties) as a sign that the GNU is working. Still, it is unfortunate that this conflict only escalated at the very last moment, given the mammoth task of preparing a Budget. Hopefully, this is a wake-up call that a coalition government requires processes to involve all partners in decision-making. The National Treasury has lifted the embargo on the content of the Budget that would have been presented on 19 February but will not engage further on it, for now.

BUDGET 2025: FISCAL CONSOLIDATION THROUGH TAX INCREASES RATHER THAN EXPENDITURE CUTS

The National Treasury pulled out the big bazooka of a 2%pt increase in the VAT rate to keep its debt stabilisation plan largely on course. However, while the Budget showed that this means the debt ratio will still stabilise this year (though slightly higher than before) and more funds will be shifted towards infrastructure investment and protecting frontline services and the poor, it will come at a significant cost to the taxpayer.

Our suspicion has always been that a VAT hike would potentially be used to fund a Basic Income Grant (BIG) or the rollout of National Health Insurance (NHI) – given the Treasury’s emphasis that it would need a revenue source to fund these expenditures. If the aborted budget had been tabled (and subsequently passed), that tax wiggle room would have all been used up - and even then, there was still nothing new in the budget for Transnet or to permanently fund the social relief of distress (SRD) grant as the basis of sustainable basic income support as promised by President Cyril Ramaphosa in his state of the nation address. So, significant unfunded expenditure risks remained.

It is important to highlight that compared to the 2024 Budget, which the Treasury described as “striking a balance” between R15bn worth of tax measures and R80.6bn in expenditure cuts over the medium term, the aborted 2025 Budget would have imposed R182.4bn of net new tax measures over the medium term but no new expenditure cuts.

The additional revenue will allow the National Treasury to ease the spending brakes: the non-budget has consolidated non-interest spending growing by 0.9% on average annually in real terms over the medium term, whereas previously, the plan was for it to contract by 0.5% a year on average. This represents a looser fiscal stance, and, while this is being achieved without a meaningful deterioration in the country’s debt metrics, a shift in the burden of adjustment. Whereas previously, the brunt of austerity was being felt in frontline government education and health services, it has now moved onto all taxpayers through a higher VAT rate, but especially onto higher income earners through the failure to provide fully for bracket creep for the second year in a row or adjust medical tax credits.

According to the National Treasury, the VAT rate increase, which would have taken effect on 1 April 2025, was “unavoidable” to ensure adequate funding for policy priorities while maintaining fiscal sustainability. To cushion the blow to vulnerable households, the Budget proposed further zero-rating other basic goods (Stats SA’s recently published Income and Expenditure Survey (IES) was used to determine which goods lower-income households typically spend more on than higher-income households), extending fuel levy relief, providing for above-inflation adjustments to social grants and a full inflation adjustment of the bottom two personal income tax brackets.

Acknowledging the concern that the VAT increase would likely dampen consumer spending and thereby weaken economic growth, which would be counterproductive, the Budget Review noted that studies have shown that increasing VAT will have the least detrimental effect on economic growth and employment relative to increases in personal or corporate income tax.

From a practical perspective, the discussion among GNU parties and Treasury will thus likely turn into one about trade-offs. If they are adamant about not raising VAT, there is no money for the ‘new’ expenditures—so what will they be willing to forfeit, or where else could the money be found? It is also important to highlight that the Treasury’s assumptions about the revenue that the VAT hike could bring in are, in our view, optimistic.

In the coming days, we will interrogate the Budget projections and proposals and consider their potential impact on the economy if they were implemented. We will keep our clients posted.

GLOBAL GEOPOLITICS AND MARKET MOVEMENTS

On the global geopolitical front, the US met with Russia in Saudi Arabia to talk about ending the Russia-Ukraine war. To its frustration, Europe has, so far, been left out of the discussion – and so has Ukraine, which has said it will not accept a deal it was not part of negotiating. European leaders met in Paris during the week to formulate a tangible plan about what is needed to ensure peace. There is talk about a major defence spending package, but it remains to be seen whether Europe can keep up with Trump. EU nations have agreed on another round of sanctions on Russia, targeting aluminium and oil exports. Meanwhile, Israel has threatened to open the “gates of hell” of Hamas if the remaining hostages are not released. While the ceasefire holds, the situation remains tense, with Israeli Prime Minister Benjamin Netanyahu emboldened by the support from Trump. In the Democratic Republic of Congo, Rwanda-backed M23 has taken control of a second big city. Despite global calls for a ceasefire, it seems as if the situation is edging closer to a further escalation. Clients are reminded of the webinar on global geopolitics with Prof Abel Esterhuyse on 25 February – missed the invite? Reach out to michoost@sun.ac.za

Meanwhile, the gold price hit another record high this week, of $2 942/oz. The yellow metal has become the ultimate ‘Trump trade’ with its safe-haven and inflation-hedge qualities appealing to investors who are worried about the impact on economic growth and prices of potential Trump-triggered trade disruptions.

The rand exchange rate was a touch stronger on Thursday against the dollar and euro than the previous week. Meanwhile, the JSE Alsi was up by just over 1% w-o-w.

WEEK AHEAD: POSTPONED CONSUMER INFLATION; ELECTIONS IN GERMANY

On the local front, the January CPI print, originally scheduled for Wednesday 19 February, will be released a week later. The January release is the first to incorporate the update to the basket and weights following the Income and Expenditure Survey 2022/23 released last month. Stats SA says that the required additional checks have taken longer than expected. Factory-gate inflation, as measured by the producer price index, follows the next day. We expect a slight acceleration in the annual headline print. The usual batch of month-end data for the previous month is released on Friday.

Internationally, the release with the most market-moving potential will be the US PCE price data for January—including the Fed’s preferred measure of inflation—on Friday. Several Eurozone countries will publish preliminary inflation data for February during the week.

However, the most significant development from Europe will be the German election on Sunday, which is set to result in the biggest election defeat of any German chancellor. Conservative Friedrich Merz is likely to succeed the Social Democrat’s Olaf Scholz, with another coalition government expected – however, it is unlikely to be a simple process in the future. A big issue has been the ‘self-imposed’ debt brake and whether a new government would want and have the required majority to change this. It will also be interesting to see how the far-right and far-left parties perform in the election and what role they could play in forming a new coalition (or blocking decisions made by a new coalition).

REFORM TRACKER – INSIGHTS FROM THE BUDGET

Roy Havemann

ESKOM DEBT STRUCTURING

In the 2023 Budget, Treausy announced significant debt relief for Eskom to strengthen its balance sheet, restructure the business and invest in necessary maintenance. It indicated that over the next three years, government would provide Eskom with debt relief amounting to R254bn in three tranches. At the time, the amounts represented what Treasury estimated was Eskom’s full debt settlement requirement over the next three years. The Treasury decided to simplify the agreement (in consultation with Eskom). However, this was before the lower-than-expected NERSA tariff decision (implying a risk).

By 31 March 2025, the government will have advanced R14bn in debt relief to Eskom. This is a reduction of R4bn from the original amount projected up to this point, owing to the utility’s failure to meet the deadline for disposing of the Eskom Finance Company. Under the terms of the arrangement, the remaining elements are a R40bn advance and a R70bn debt takeover scheduled for 2025/26. The final R70bn debt takeover will now be replaced with two advances totalling R50 bn: R40bn in 2025/26 to redeem debt maturing in April 2026 and R10bn in 2028/29 for debt maturing in May 2028.

In summary, over the five-year period, the government will have provided Eskom with loans to the value of R230bn to assist the utility in repaying its debt. This is about R24bn less than projected at the outset, reducing the gross borrowing requirement. In accordance with the original agreement, the debt relief provided to Eskom will be converted into government equity over time, and Treasury officials signalled in the Q&A that they do not anticipate further support.

NO DIRECT SUPPORT FOR TRANSNET

In contrast with what we expected, no direct support in terms of debt relief or balance sheet support was provided to Transnet in the Budget, with the Treasury rather opting to support the entity by helping with critical infrastructure projects, such as the expansion of the land‐side container terminal in Cape Town. The R2 billion Budget Facility for Infrastructure (BFI) is not new. Improved rail volumes are attributed to the support of Operation Vulindlela in the Budget document, with the entity making “some progress in implementing its recovery plan”.

This is, indeed, yet another risk for the March budget—our estimate is that Transnet needs around R46bn in this fiscal year.

DOMESTIC SECTION

Nomvelo Moima

UNEMPLOYMENT RATE IMPROVED FURTHER IN Q4

Stats SA’s QLFS showed that the official unemployment rate declined by 0.2% pts to 31.9% in 2024Q4 from Q3. Total employment rose by 132 000 in the fourth quarter, with growth being driven by four out of 10 sectors. Finance saw the largest jump in employment (+232 000), followed by manufacturing (+41 000). Conversely, community and social services recorded the largest number of job losses (-63 000). The second consecutive quarter of improvement in the unemployment rate is a welcomed indication of slightly better labour market conditions during the second half of 2024. However, the expanded unemployment rate (which includes discouraged workers) remained steady at 41.6%. Additionally, the number of discouraged job seekers rose further in Q4, continuing a concerning trend since the pandemic.

DOMESTIC TRADE LIKELY TO BOOST Q4 GDP

Stats SA also released a slew of domestic trade data for December, providing insights into consumer spending during the fourth quarter. In line with expectations of a modest rise, real retail trade sales rose by 3.1% y-o-y in December. This follows a 7.6% y-o-y jump in November 2024, which was the strongest month since July 2022. Retailers of textiles, clothing, footwear and leather goods reported the steepest sales increase (up 7.8% y-o-y). Wholesale trade sales also showed positive growth, rising by 0.9% y-o-y in December after a sharp 7% y-o-y decline in the previous month. Meanwhile, motor trade sales performed poorly in December, declining by 4.4% y-o-y and contracting for a second consecutive month after recording positive sales in October. Five of the six sectors contributed to the decline in the annual figure, excluding used vehicle sales.

For Q4, the trade figures showed that retail trade sales rose by 2.1% q-o-q seasonally adjusted (sa), wholesale trade sales increased by 2%, and motor trade ticked up by 0.5%. This suggests that the trade sector will likely add to GDP in Q4, and indicates that consumers, who experienced some windfalls during this period, ended the year on a strong note. The question is whether to what extent this momentum will be sustained into 2025 (especially if significant tax increases are implemented). Looking at the full year, real retail trade sales increased by 2.5% in 2024. In contrast, wholesale trade sales fell by 5.2%, and motor trade sales decreased by 3.4% in 2024.

INTERNATIONAL SECTION

Nkosiphindile Shange

UK INFLATION JUMPS TO 3%, REACHING A 10-MONTH HIGH

The Office for National Statistics reported that UK annual consumer inflation accelerated to a 10-month high of 3% in January 2025, faster than the expected 2.8%, and the 2.5% inflation recorded in December 2024. The acceleration was mainly driven by higher prices in food items such as meat, bread, and cereals, increasing fuel prices, and the increased costs of education services since the government withdrew a VAT exemption benefit. Annual core inflation came in at 3.7%, matching expectations but higher than the 3.2% of December. Services inflation was lower than expected and aligned with the Bank of England (BoE)’s expectations of 5%, higher than 4.4% in December. In general, rising inflation complicates the BoE rate-cutting trajectory for the year. With the next meeting on 20 March, the probability of a rate cut decreased from 24% to 15% following the inflation news. 

In the Pacific, Japan’s 2024Q4 GDP surprised on the upside with an annualised 2.8% expansion, up from 2.4% in Q3. This was due to moderate growth in consumer spending (0.5%), previously depressed, and steady exports (4.3%). The better-than-expected GDP print contributed to a stronger yen as the markets anticipate it will lead to more rate hikes by the Bank of Japan.

ECONOMIC SENTIMENT IN GERMANY IMPROVES

The headline ZEW Economic Sentiment Index for Germany jumped from 10.3 in January to 26 in February, beating the forecast. This marks the strongest monthly increase in two years and the highest reading since July 2024. The Current Situation Index came in at better-than-expected -88.5 in February, compared to -90.4 in January. This points to optimism returning in the German economy, but it is premature to conclude that the economy will recover strongly from hereon. . Private consumption is expected to gain momentum in the next six months, while recent interest rate cuts should also benefit a sector such as construction.

CONTACT US

Editor:         Lisette IJssel de Schepper
Tel:              +27 (0)21 808 9755
Email:          lisette@sun.ac.za

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