Finance Minister Enoch Godongwana should use the priorities of the State of the Nation Address (Sona) and focus the 2022 budget on what will grow the economy and create jobs in real terms.
He could achieve this by allocating more resources to manufacturing and manufacturing that spans multiple industries as diverse as the future of automotive, chemicals, electronics, healthcare and textiles. Godongwana must ensure commitment to President Cyril Ramaphosa’s priorities to realize a growth of Buffalo Miracle.
The main cause of South Africa’s deteriorating public finances is a lack of growth in the economy and recently the pandemic that has wiped out companies that are expected to contribute to corporate taxes and create sustainable jobs. Strengthening the macroeconomic framework to provide certainty, accountability and manage government debt-to-GDP at a reasonable level for the South African economy is essential for economic development and recovery.
South Africa’s macroeconomic fundamentals have weakened and vulnerabilities have increased. Covid-19 has further deteriorated the fiscal position in 2020 and 2021, the state-owned enterprises (SOEs), whose operational and financial performance has deteriorated to complexity levels. Public debt-to-GDP is estimated to be close to 94 to 100 percent of GDP in 2022.
Private investment should gradually pick up as the Covid-19-related uncertainty eventually eases. In the medium term, growth is expected to weaken to 2.4 percent in 2022, capped by structural restrictions on investment, prevailing policy uncertainty, the potential elective conference and increased public debt, which will hamper job creation.
Godongwana is expected to allocate a higher percentage of the budget to economic development, including special economic zones (SEZs), agriculture and agro-processing, light and heavy manufacturing, technological advancement and infrastructure development projects, and that can stimulate economic growth, economic development and job creation.
The second highest percentage should be allocated to paying off government debt to GDP, which ranks higher on the budget allocation for 2020 and 2021. The finance minister is not expected to raise corporate and personal income taxes in 2022.
The SEZ program aims to attract Foreign Direct Investment (FDI) to increase firm-level investment and improve firm-level productivity by improving firm-level coordination, networking and innovation.
The effectiveness of tax incentives for both foreign and domestic investment deserves special attention. The estimates indicate that export-oriented investments (by multinational companies) are particularly sensitive to taxation in host countries, that this sensitivity appears to be greater in developing countries than in developed countries, and that this sensitivity becomes even greater over time.
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The aim of the SEZ policy is to attract foreign direct investment (FDI) to stimulate growth. Therefore, Antswisa Transaction Advisory Services expects the Minister to review the tax incentives and align them with the interests of investors, as the main purpose of SEZ is to attract foreign direct investment through lower tax incentives and other infrastructure benefits for investors, and that will enable the SEZs to create much-needed jobs.
Trends in FDI flows usually reflect investor confidence in South Africa’s political and economic conditions. Within certain limits, it can therefore serve as a barometer of South Africa’s perceived stability, both politically, economically and socially, and to what extent governments and investors are believed to have the capacity to manage potential risks.
Godongwana must give the nation confidence in South Africa’s debt restructuring mechanisms and agreed revised repayment terms up to yearly, as the International Monetary Fund expressed concerns about South Africa’s prospects remaining precarious.
Godongwana is expected to allocate to a balanced SA Energy Mix and state-owned enterprises. It would be astonishing to hear the post-pandemic economic strategy for a state bank and sovereign Wealth Fund.
Miyelani Mkhabela, CEO and Chief Economist at Antswisa Transaction Advisory