by CHANTAL MARX
JOHANNESBURG, (CAJ News) – AGAINST a backdrop of substantial economic risks – including fiscal weakness, external volatility, and pressing social needs, Finance Minister Enoch Godongwana delivered what was clearly a “compromise budget”.
The budget presented was largely neutral for bonds and equities. During the speech, the rand hovered at weaker levels before strengthening, and bond yields came down sharply after rising earlier in the day.
The equity market recovered after a sharp dip at the start of the speech from intra-day highs. In particular, the Financials 15 index along with the Small and Mid-cap indices (which are good proxies for SA Inc.) moved sharply down before recovering to end higher on the day.
For bonds: A sustained commitment to debt consolidation will be welcomed by debt holders. A primary surplus is still expected this year and will increase from 0.5% this year to 0.9% of GDP in fiscal 2025/26. This will help debt peak and stabilise at 76.2% of gross domestic product (GDP). However, this is at a slightly higher level than envisioned in the Medium Term Budget Policy Statement (MTBPS) and 2024 Budget – which may be negatively perceived by debt holders.
For equities: Optically, this was a negative budget for equities as higher taxes are generally regarded as negative from an economic growth perspective. Some of the measures put in place to protect lower income consumers and Small and Medium Enterprises (SMEs) may limit this impact somewhat. Additionally, the National Treasury remains notably serious about structural reforms and boosting economic growth, but this could take longer to materialise into a meaningful shift in the economic environment, consumer and business spending patterns, and a lift in corporate profitability.
Some of the more specific impacts on SA equities include:
From an SA Inc. perspective, a controversial VAT increase, while lower than initially suggested in February and split over two years, will have a negative impact on either consumers (higher prices) or businesses (taking a margin hit in lieu of increasing shelf prices).
Additionally, personal income tax will not be adjusted for bracket creep, and “sin taxes” were increased which will also have a negative impact on consumers. The absence of additional fuel levies (except for higher carbon tax), grant increases of ~5.5%, and a 5.5% increase to the public sector wage bill will be positive. As will a bigger basket of zero-VAT rated goods.
Zero-VAT rated goods include canned vegetables, dairy liquid blends, and organ meat. This could be positive for canned food producers like RFG and Tiger Brands as well as Poultry product producers like Rainbow Chickens.
Specific to “sin taxes”, excise tax is set to rise by more than CPI on a blended basis. This will be negative for Tobacco and Alcoholic Beverage Producers (although BTI and ANH’s exposure to South Africa is small).
The absence of an increase in fuel levy will be positive for logistical companies, although many operate on pass through basis
A re-commitment to infrastructure investment will be positive for infrastructure players – especially in the construction space. Specifically, a large allocation was made to Roads, Electricity and Water & Sanitation, benefitting the likes of Raubex and Wilson Bayly Holmes. Support services will also benefit, particularly those in equipment and materials.
Property transfer duty brackets were adjusted by 10% to compensate for inflation. This could be positive for the residential real estate players including developers like Balwin and Calgro and REITs like SA Corporate with large residential exposure.
An inflationary increase in the health promotion levy that was set to come into effect on 1 April was cancelled. This will be welcomed by the Food Producers – particularly those with a large contribution from “snacks and treats” like AVI and Tiger Brands and RCL Foods – with a major Sugar business in its stable.
While today’s budget has been tabled, it has not been passed and it has not received full support from the GNU. For the budget to be passed there are parliamentary processes over the next few weeks that can allow parties to reach the agreement needed for the budget to become official.
As a result, the uncertainty is not over, and much will happen over the next few weeks. This could impact the perception of stability in government and may induce volatility from a financial markets’ perspective.
NB: Chantal Marx is Head of Investment Research at the First National Bank (FNB) Wealth and Investments
– CAJ News