In late 2016, when the three main credit ratings agencies conducted their year-end reviews, SA narrowly avoided a downgrade to subinvestment grade. Markets viewed this as a vote of confidence in Finance Minister Pravin Gordhan’s plan — outlined in his October mini budget speech — to stabilise finances and restore growth.
The rand stabilised and business sentiment improved, suggesting better business conditions in 2017. However, critical details of Gordhan’s programme will be announced only in the full budget in February,
including several measures that will directly affect companies’ performance in the year ahead.
State revenue collection has not kept pace with the government’s spending plans. To help plug the fiscal gap and reduce the need for heavier borrowing (a major concern for ratings agencies), Gordhan announced in October that the overall tax take would rise by R28bn in 2017 and R15bn in 2018, but he provided no specifics. In all likelihood, the government will proceed with steps that it believes to be politically feasible and the least economically damaging.
An increase in value added tax is improbable, for example, given that it would prove especially burdensome for lower-income households, a core ANC constituency. Similarly, corporate income tax hikes are unlikely since they would further damage weak investor confidence.
It is much more likely that the February budget will contain practical details on how the government will introduce the tax on sugar-sweetened beverages that it indicated in 2016 would become effective from April 2017. Since the tax will probably take the form of an excise duty on the amount of sugar added to drinks, the effective rates are likely to differ from product to product, and may be introduced incrementally to soften the adverse consequences for the beverage industry, which is a large employer.
Firms in the beverage sector will need to weigh the merits of passing the extra tax burdens on to consumers through higher prices. Given that consumers are already under pressure from stagnant real wages, companies with diversified product portfolios that are able to offer lower-cost alternatives — thereby allowing consumers the option to trade down — may be the best placed.
So-called sin taxes on alcohol, tobacco and other nonstaple products could see real increases — as has been the case in successive February budgets — with consequent knock-on effects for consumer demand, particularly among middle-and higher-income segments.
Business should also expect sales to be affected by Gordhan’s trimming of official entertainment budgets, which would undermine sales of alcohol products, although adherence to this regime is likely to be uneven across the government.
Firms in the beverage sector will need to weigh the merits of passing the extra tax burdens on to consumers
The February budget is likely to outline the government’s approach to implementing a new carbon tax. The legislation was introduced to Parliament in late 2015, but has been revised following intense lobbying. As with the sugar tax, Gordhan may seek to phase in the new regime to minimise negative consequences for industry, particularly the critical automotive sector, which is already under pressure from falling sales. Companies that service the automotive sector should plan for the carbon tax to become effective in 2017, and take the opportunity to aggressively market low-carbon technologies.
One area in which Gordhan is likely to prove more generous is the government’s employee tax incentive scheme, which subsidises companies to hire younger workers. Due to political pressure to tackle rampant unemployment, companies can expect Gordhan to outline plans to increase the amount the government can spend on supporting the incentive, abandoning the current cap on how much individual firms can claim, while extending the scheme’s duration, probably to 2019. The incentive provides a compelling inducement for multinational corporations eager to reduce their exposure to currency volatility risks by localising production.
However, its benefits should be weighed against more stringent black economic empowerment rules coming online in 2017 that tighten regulations on multinational corporations’ hiring practices while also requiring firms to be partially owned by local black partners.
Gordhan has on several occasions raised the issue of increasing the use of public-private partnerships in strategic port, rail and energy projects to alleviate the financial burdens on state-owned enterprises. He is likely to reiterate this strategy in the budget announcement, though politically connected interests — aiming to prevent their monopolies from being opened up to greater competition and scrutiny — could complicate this process. Companies with strong government liaison capabilities will be best placed to take advantage of emerging opportunities.
• Attwell is a senior analyst covering sub-Saharan African markets at Frontier Strategy Group in London
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