Facing economic realities
- In his 2015 Budget Speech, Finance Minister Nhlanhla Nene notes that the negative impact of the persistent electricity constraint is far-reaching and is not only holding back growth in the relatively electricity-intensive mining and manufacturing industries but is also inhibiting investment in housing and raising costs for a range of other business and households.
- Treasury has made a further downward revision to its GDP growth forecast for 2015 cutting it to 2.0% from the 2.5% indicated in October last year – largely to account for the emerging impacts of the electricity supply crisis on growth.
- Treasury expects a moderate improvement in the growth outlook over the next few years, with GDP growth expected to reach 3.0% in 2017 (as indicated in October 2014)
Tax revenues disappoint pushing the budget deficit somewhat wider
- Tax revenues for the 2014/15 fiscal year have been lower-than-expected, which together with a once-off R15bn reduction in UIF contributions, saw the consolidated budget deficit, expressed as a percentage of GDP, widening slightly to 3.9% from 3.8% in 2013/14. This was wider than the 3.6% estimated in the 2014 MTBPS last October. The deficit on the main budget widened to 4.7% of GDP in 2014/15 from 4.4% 2013/14.
- Debt-services costs continue to be the fastest-growing component of the main budget expenditure and are expected to rise to ~R153bn in 2017/18.
- It was encouraging to note that net loan debt is expected to stabilise at 43.7% of GDP in 2017/18 which is 2.6 percentage points lower than the 2014 MTBPS estimate owing to a change in the debt issuance strategy. Net loan debt including provision and contingent liabilities are also expected to remain within SADC’s self-imposed ceiling of 60% of GDP in the MTEF period and peak at 58.1% in 2015/16.
Measures to address the electricity crisis and stabilise Eskom finances
We view strong encouragement from government for Eskom to move to cost-reflective tariffs as a positive development as it is far more efficient for consumers to face the true cost of electricity than for government to provide Eskom with implicit subsidies (in the form of equity, financial guarantees or loans). Higher electricity prices may also assist in curbing demand as they provide a clear incentive for consumers to realise efficiencies and reduce consumption. Increased funding and support for energy-efficiency and demand-side management initiatives that can be implemented in the short-to-medium term are also welcomed.
Measures government is working on with Eskom to address the electricity crisis include:
- Government at the end of 2014 invited bids from independent power producers to build 2500MW of baseload coal-fired power which could be added to the grid from 2020
- Efforts to secure additional supply from gas and renewable resources are being accelerated.
- An additional 800MW of co-generation capacity will be procured within the next 6 months.
- Government is requesting proposals for 3126MW of power from natural gas, with initial power expected to be available from 2020. Steps are underway to switch OCGT plants from diesel to gas.
- A wide range of options to improve energy-efficiency and manage demand are being considered – including smart meters, power “buy back”, time of use tariffs.
Other measures to stabilise Eskom’s financial position:
- Eskom will apply to the national energy regulator (NERSA) this year (instead of at the end of MYPD3) for further electricity tariff adjustment via the clawback mechanism and will apply for an MYPD3 reopener in 2016 in a move to allow it to move to cost-reflective tariffs. Eskom was awarded annual average increase of 8% for the MYPD3 period rather than the 16% it requested.
- Treasury will also provide Eskom with a R23bn capital injection announced in the 2014 MTBPS. As announced previously these funds will be raised in a budget neutral way, from the disposal of non-core assets. No further detail was given in the budget on the non-core assets will be sold – the information is sensitive as some of the assets under consideration are government shares in listed companies.
- Government is also considering converting a sub-ordinated loan to equity to support Eskom’s balance sheet.
Increasing taxes on fuel, electricity and middle-to-high income households to close the gap
With Treasury having already hinted in the 2014 MTBPS that the progressive nature of the tax system should be enhanced, we expected that the tax burden of wealthy individuals would be increased. As anticipated there was no increase in VAT but we were surprised to see an increase in the marginal PIT tax rates for all individuals earning above R181,900 per annum as this increases the tax burden on both lower and higher-middle income households. PIT increase are however slight, raising tax contributions for individuals by between ~R300 at the lower-rend and ~R1,000 a month at the higher-end.
It also announced sharp increases in the electricity levy (57%) and the fuel levy (25%). The increase in the fuel levy will partly negate relief to households and firms provided by lower-oil prices but will raise ~R10bn in additional revenue. The increase in the electricity levy will also result in an immediate increase in electricity prices for both firms and households but will raise an additional ~R5bn in revenue. We are pleased to see however that increased revenues from the levy will however be recycled in the form of extended tax incentives to promote greater energy-efficiency which should in turn will reduce firm’s exposure to rising prices and promote competitiveness. The more generous tax regime for small businesses that are registered for turnover tax – in the form of lower rates and higher thresholds, is also welcomed.