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South Africa 2015 Budget: Could Tax Reforms Stifle Economic Growth?

South Africa 2015 Budget: Could Tax Reforms Stifle Economic Growth?

Walker England, Kara Dailey,

Talking Points:

  • 4th quarter GDP exceeds expectations, growing 4.1% (q/q) and 1.3% (y/y)
  • 2015 Budget Proposal includes a reduction in expenditure and an increase in tax revenue
  • USDZAR continues to consolidate in a broadening pattern

With the release of better than expected 4th quarter GDP data, the rand appreciated 1.7% against the U.S. dollar on Tuesday. However, the gains may be transitory, as the South African Government looks to implement nine strategic initiatives in 2015, all conditional on a narrowed budget accompanied by higher taxes.

Reported by Statistics South Africa, GDP expanded in the final quarter of 2014 at a rate of 4.1% (q/q) and 1.3% (y/y). When measured on a quarterly basis, the manufacturing industry was the principal contributor; growing by 9.5%, production was heightened in the petroleum, chemical and rubber division. When measured on a yearly basis, the most notable performances arose from the following industries: Agriculture/Forestry/Fishing (+4.2%), Construction (+2.9%), and Transport/Storage and Communication (+2.4%).

The rapid economic gains from the 4Q, however, are expected to fade as the Ministry of Finance has revised their GDP estimates for 2015 down to 2.0 from 2.5 percent. Reasons cited include: South Africa’s energy supply challenge, their ability to add value to mineral wealth, and the country’s underwhelming level of private investment. Addressing these challenges will require adjustments in the budget framework—a reduction in the expenditure ceiling (-R25b) and an increase in tax revenue (+R17b).

Of the two modifications, the latter is perhaps the most contested. Consumers will purportedly bear the burden in raising revenue which could put South Africa’s economic recovery at risk. With few options left, Minister of Finance Nhlanhla Nene, has proposed a personal income tax hike of 1% for those with earnings in excess of R181, 900 as well as an increase in the general fuel levy. Also proposed, a temporary increase in electric levies to help manage demand.

USD/ZAR Daily Chart

Chart Created by Walker England Using MarketScope2.0

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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