The downside
February was National Budget Month; predictably, some downsides emanate from the government’s annual spending and tax plans. The decision by the National Treasury not to adjust the individual tax brackets for the effect of inflation will hurt those whose salary increases push them into a higher tax bracket – no wonder this phenomenon is called “bracket creep” or “taxation by inflation”. Unfortunately, the conflict in the Middle East, combined with a weaker rand exchange rate, has taken its toll on petrol and diesel prices, which will be more expensive in March. Fuel prices nevertheless remain lower than in November 2023. Emerging market currencies, including the rand, should start strengthening again as soon as interest rates in the US resume their downward trend.
The upside
Novel utilisation of the country’s forex reserves
Most countries have foreign exchange reserves held by their central banks, which can be used to maintain macroeconomic stability, and this is precisely what has been implemented by the National Treasury in the wake of the tax revenue shortfall experienced during the 2023/24 fiscal year. For anyone who is concerned over this practice, it is interesting to note that the origin of the hefty R885 billion in foreign exchange reserves currently held by the SA Reserve Bank (SARB) was a fiscal transfer to the SARB of (merely) R28 billion made by then finance minister Trevor Manual in 2003.
South Africa’s forex reserves swelled from less than R500 billion a decade ago to close to R900 billion, which has proven to be an enormous windfall in the current macroeconomic climate of subdued growth and below-par tax revenue collections. Finance Minister Godongwana plans to draw down R150 billion of these reserves over three fiscal years, which will play a key role in maintaining fiscal stability over the medium term.
Other good news from the 2024/25 Budget is a repeat of the stated commitment by the government to much closer cooperation with the private sector in fixing the mess surrounding the country’s infrastructure, especially in energy, roads, harbours and railways. Furthermore, key rates of taxation have been kept unchanged.
The producer price index remains in the target range.
Although the producer price index (PPI) increased marginally from 4% to 4,7% in January, the three-month moving average suggests that downward momentum is still intact, with signs that a more stable level of between 4% and 6% could be achieved for most of the year.
Scrutiny of the latest PPI reveals an encouraging trend for lower producer prices for food and beverages, which account for almost a third of the total index. The PPI invariably acts as a leading indicator for consumer prices, and the chances of the Reserve Bank lowering its official interest rate at the end of March have improved.
Recovery of gross foreign direct investment
Over the 12 months ended September 2023, gross foreign direct investment (FDI) inflows on the South African balance of payments achieved a record-high quarterly average (excluding the Naspers share swap transaction of 2021). Between the first quarter of 2022 to third quarter of 2023 (associated with the end of lockdowns and economic recovery in most sectors) the average quarterly inflow of gross FDI amounted to R28,7 billion – an increase of 140% over the average inflows recorded in 2020 and 2021..
On Balance by Dr Roelof Botha deliberately emphasises positive news that, more often than not, confirms the resilience of the South African economy and the immense scope for new business opportunities.