Cape Town - All eyes and ears were on Pravin Gordhan when he delivered South Africa’s most-anticipated budget speech since 1994. But the jury is still out on whether the quick-witted and highly respected finance minister did enough to allay the fears of jittery investors and ward off a possible downgrade to junk status.
The rand depreciated sharply 20 minutes into Gordhan's speech, but mostly because Moody's downgraded Brazil to junk status. Moody's believes that Brazil will average negative growth for the next 3 years.
The measures Gordhan announced in his budget were aimed at bringing about fiscal consolidation and included a reduction in the expenditure ceiling of R25bn, shrinking the budget deficit to 3.2% in the current year, stabilising debt at 46.2% and curbing the public wage bill which increased far in excess of inflation last year.
The tax increases he announced were largely aimed at wealthy individuals through increases in capital gains tax and transfer duties on the sale of properties above R10m, while low- and middle-income earners received some good news in the form of zero increases in the personal income tax rate.
Tax brackets for these earners were also adjusted upwards to compensate for the impact of inflation. (See tax tables below)
Gordhan made the right noises about not bailing out loss-making state-owned enterprises any longer, indicating that the number of parastatals could be reduced or that some could even be shut down if they no longer served a purpose. The possibility of a merger between South African Airways and SA Express also received praise from the business sector.
SA must bite the bullet
Gordhan made it clear that government cannot spend money it doesn’t have, and that South Africans should ride the financial storm.
The banking sector was by and large positive about Gordhan’s speech. “Despite announcing personal income tax relief of R5.5bn for lower- and middle-income earners, the budget speech was a stark reminder that consumers need to get used to doing more with less,” said Ester Ochse, channel head at FNB Financial Advisory.
Johan Gouws, head of Absa asset consultants, was of the view that the budget was “consumer-friendly, recognising the pressures households are facing”.
However, there were also rumblings that Gordhan’s budget fell short of reassuring investors that South Africa is open for business, because structural reform was not addressed. Gordhan also failed to mention the possibility of privatisation of state-owned enterprises.
During a press conference on Wednesday morning ahead of his speech, Gordhan refused to be drawn into any discussion about privatisation. “Listen carefully: I didn’t mention the p-word (privatisation), but I did speak of finding equity partners,” he said.
Mark Joffe, CEO of Global Credit Ratings, said it remains to be seen whether credit rating agencies such as Moody’s and Standard and Poor’s will concur with Gordhan’s view that National Treasury has taken sufficient measures to avert a credit rating downgrade for now.
* Visit our special issue on Pravin Gordhan's 2016 Budget Speech.