In less than two months SA will again face the scrutiny of Moody's, the international ratings agency that may push our credit rating to junk.
The outcome of the Moody's assessment may largely be influenced by how finance minister Tito Mboweni juggles priorities in his budget on February 26.
And it is clear Mboweni has little room to manoeuvre.
The first hurdle he will have to cross is substantially lower tax revenue, which economists now estimate will reflect a shortfall of about R25bn compared to the National Treasury's revised forecast in October.
The revised budgeted tax revenue estimate for the year to end-March 2020 is R1.36-trillion, but so far collections are sitting at R825bn - though the South African Revenue Service (Sars) is expected to ramp up collection towards year-end in March.
Factors driving lower tax collection include a decline in company profits and a drop in employee tax as retrenchments rise. Dividend taxes have also dipped over the past year amid tepid economic growth.
GDP figures for 2019 will be published early next month, but expectations are for growth to have slowed to 0.4%, compared to 0.8% in 2018. The growth forecast in 2020 is equally dismal, with expectations of less than 1%.
6,500
The number of taxpayers in 2018 who earned more than R5m a year,down from 7,500 three years ago
Tax brackets
This week, tax experts and economists at Mazars said during a round-table discussion that a worrying factor was that an easily collectable tax, such as pay as you earn, which is collected by companies on behalf of Sars, is at 63% of the total tax revenue forecast for the 2019/2020 financial year, compared to 65% in the same period the previous year.
VAT collections have fallen 6% compared to the previous year, which is a further signal of a weak economy.
But despite the financial pressure South Africans face, the finance minister may not adjust personal income tax brackets to provide relief for inflation, which would result in a greater tax burden for higher-income earners. This passive collection netted the government R9bn in previous years.
In previous years the Treasury provided relief, in terms of the tax brackets, for lower-income earners, but in these desperate times, when the government cannot afford for tax revenue to decline dramatically, this may no longer be the case.
Such a move could yield more revenue, but this may not be politically palatable, the experts said.
Mike Teuchert, Mazars' national head of taxation services, said more worrying was the potential dwindling of the 120,000 or so high-income earners who are taxed at a rate of 45%.
"I'm waiting to see whether those numbers will fall off," he said.
The loss of high-income earners means tax authorities will have to dig deeper into lower-income brackets to cover a future shortfall.
High-income earners
Busisiwe Mdletshe, CEO of Btmt Capital, said a further hike in personal income tax at the upper end of the pay scale may see wealthier taxpayers considering emigration because a hike could be regarded as "punishment for those already in the system".
She said another tax on the wealthy - capital gains tax - may remain unchanged, unless this is hiked to counter political discomfort with a potential VAT increase.
High-income earners account for 30% of SA's personal income tax.
Three years ago, SA had 7,500 taxpayers earning more than R5m annually, but this dropped by 1,000 in 2018. The figure for last year is not yet available.
Another one-percentage-point or two-percentage-point hike in VAT is a possibility alongside the regular increases in sin tax and the fuel levy, Mazars experts said.
Mdletshe said another one-percentage-point VAT hike could rake in up to R35bn. She said the Treasury is unlikely to hike corporate income tax from its current rate of 28% as this would put SA at a disadvantage in terms of attracting investment.
By comparison, China's corporate tax rate is 25% and the UK's about 19%. "I think people are going to be up in arms if he touches corporate income tax," she said.
Substantially lower tax collections from companies in 2018 and 2019, which fell 36.9%, and the number of companies registered for income tax decreasing from 3.2-million in 2017/2018 to 2-million in 2018/2019, according to Sars, mean any hike in the corporate tax rate is more likely to send companies over the edge than yield higher revenue for the state.
Trimming the bloated public sector wage bill, of about R675bn which rises by more than inflation annually, is another concern for the finance minister and ratings agencies.
In a research note this week, Barclays said its baseline assumption is that savings of R20bn to R30bn annually over the next three years are attainable.
But "this is much less than the R150bn of cost savings required to stabilise the country's debt metrics and stave off a ratings downgrade", writes Michael Kafe, an economist at Barclays UK.
Kafe writes that a public sector wage freeze would be the least disruptive policy and may help generate the R150bn of medium-term savings required. But the political will to give effect to this ahead of the ANC's national general council (NGC) later this year will be lacking.
"There is no reasonable basis to expect a reformist budget," he said, although Mboweni may surprise the market. But given that there have not been "documented discussions within the ruling party, outside of the usual sloganeering about the need to preserve jobs . we do not have a reasonable basis to expect a fiscally frugal budget."
Azar Jammine, chief economist at Econometrix, said the latest budgetary figures show a situation that "looks awful", one that has deteriorated since the medium-term budget policy statement in October last year. The resumption of load-shedding, which is expected to dent growth that is already weaker than anticipated, and the further financial decline of some state-owned enterprises, such as South African Airways, have added to the government's woes.
The budget deficit - the difference between the government's revenue and expenditure - is now expected to be 6.9% of GDP from a projected 6.2%.
Jammine said against this backdrop, a Moody's ratings downgrade appears to be already factored in by the markets, and the rand's weakness in recent days was due to the impact of the coronavirus on global growth.
But some are holding out hope that SA may get another reprieve from Moody's, which is the only remaining major ratings agency that still rates SA as investment grade.
Kafe said recent comments from Moody's indicate it may be too early to judge SA's performance.
Barclays expects Moody's to pass on its March review date, and predicts a downgrade in November, after the medium-term budget policy statement in October. "Unless, of course, the government is able to demonstrate some credible, decisive action shortly after the ruling party's NGC."
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