Analysts say there was a “mixed response” in South Africa's budget among the country's banks and financial institutions.
The African National Congress (ANC) and its finance minister Enoch Godonwana were in Loggerheads with its coalition partner, the Democratic Alliance (DA), for weeks beyond a controversial plan to raise the VAT from 15% to 17%. There was also fear from some of the DAs. This is seen as a professional business party that the ANC can try to raise other taxes and promote investment and economic growth potential.
With a compromise, Godonwana proposed to raise VAT to 16% in two stages in the budget. Other measures include freezing personal income tax thresholds. This means that earners will pay a practically higher taxes as their salary increases along inflation.
The budget is closely monitored by South African banks, and last year saw massive revenue growth as the country improves macroeconomic climate and stabilizes the political environment.
Menzi Ndhlovu, political and economic analyst for Cape Town's signal risk, said “the response to South Africa's interbank budgets is quite mixed,” and that there are both potential risks and opportunities for financial institutions.
“On the other hand, we have not seen any increase in capital gains tax or capital-related taxes, nor have we seen any attempts to restructure our debts. Neither is suitable for banks,” he says. “This isolates them from short-term losses or liquidity constraints.”
“But on the downside, some of the budget measures could carry out consumption and credit growth. Bracket creep (freezing tax thresholds) implemented by the Finance Minister could enable SAP demand, especially for credit,” Ndhlovu tells African businesses.
“But at the same time, South Africa remains a credit-based economy. Microcredit is a booming business among banks, and it is booming. This could enable banks to ease financial pressure on consumers and small businesses and enable ways to increase revenue.”
Market response to budgets is relatively stifled, and Ndhlovu believes it suggests that financial institutions are “not sad or happy.”
In fact, stock prices at Standard Bank, South Africa's largest bank, have risen slightly, following last week's budget announcement. South African Rand (ZAR) exchanged steady and steady against the US dollar for the days after Godonwana's budget speech, but the 10-year government bond yields remained flat.
“Banks are relieved by the limited movements we see in South Africa's bonds and RAND. Given some of the political uncertainties around the budget, they are not responding as badly as they expected,” says Ndhlovu.
South African banks flourished last year due to an increase in political stability after the formation of the GNU. Credit rating agency S&P Global upgraded South Africa's outlook after the election from “stable” to “positive,” which “reflects our view that the increase in political stability after the May general election could drive reform driving private investment and GDP growth.”
Given this, Ndhlovu told African businesses that “the biggest concern about banks is taking into account political fragmentation within the dominant coalition.”
“But in many quarters this has been very exaggerated. The Union government was not smooth, not smooth. The negotiations seen before the budget are part of the process that comes with Union government and should be expected,” he adds.
“The political situation is manageable. There is an assessment of the economic risks associated with political fragmentation, and there is a strong incentive for both parties to be together to minimize the risk.”
