Latest news with #TertiaJacobs
The Citizen
3 days ago
- Business
- The Citizen
Surprise that all MPC members were in favour of repo rate cut
Economists say they agree with the decision to cut the repo rate by 25 basis points, but only expect one more this year. After the MPC had a hawkish stance in the past few repo rate decisions, economists thought that another cut would not be on the cards today. But after inflation for April was still below 3%, they started to wonder if a cut could indeed happen. Tertia Jacobs, treasury economist and fixed income specialist at Investec, says the surprise was not the 25 basis points cut, but the fact that the governor of the South African Reserve Bank (Sarb), Lesetja Kganyago, was in favour of a 50 basis point rate cut. 'We would have concurred with the 50-basis point rate cut because we see that the Sarb is behind in the rate cutting cycle. It was interesting that there was a lot of time spent on discussing a lower inflation target. The Sarb really pushed hard for the lower target, but the governor said they need the buy-in from Treasury.' ALSO READ: Reserve Bank cuts repo rate thanks to lower inflation, stronger rand Unanimous decision to cut repo rate Jee-A van der Linde, senior economist at Oxford Economics Africa, points out that five members of the Monetary Policy Committee voted for a 25 basis points cut, while one member preferred a larger cut of 50. 'Although our subjective odds shifted in favour of a 25 basis points cut, our forecast for this meeting indicated an unchanged policy rate, with voting patterns remaining tight due to the exceptionally uncertain external environment.' He says the latest repo rate cut suggests that the Sarb is comfortable with South Africa's inflation outlook, including potential upside risks to prices. 'Looking ahead, we forecast headline inflation will consistently average above 3% from the second half of 2025, trending gradually higher over the near term. 'This suggests that monetary authorities will have their work cut out for them if they want inflation expectations to decrease from current levels (4.3% in 2025 and 4.6% in 2026) to 3%. The Sarb said it will consider scenarios with a 3% objective at future MPC meetings.' ALSO READ: Repo rate cut offers no shelter from Budget 3.0 fallout for consumers It was the right decision – economist Prof Raymond Parsons, economist at the NWU Business School, says he believes the MPC decision to resume its interest rate-easing cycle by reducing rates by another 25 basis points is the right one. 'It is a welcome recognition of the changed economic circumstances which have made this possible. 'The majority view of the MPC therefore recognised the other factors which made it both desirable and practical to further cut borrowing costs for business and consumers at this key juncture in South Africa's business cycle. 'At this stage even a small reduction in interest rates can have a big positive impact on the national economic mood and on confidence levels. Although it is recognised that monetary policy cannot do the heavy lifting in South Africa's growth performance, lower borrowing costs are nevertheless supportive of the country's incipient but weak economic recovery.' ALSO READ: Reserve Bank could cut repo rate on Thursday, but will it decide to? More positive inflation outlook can bring more repo rate cuts Harry Kellan, CEO of FNB, says the repo rate cut comes at a time when there is a more positive inflation outlook for the rest of the year, along with growing urgency to boost economic activity. He expects that the repo rate will be reduced once more this year. 'Interest rates and inflation must be viewed in a wider context. We saw a sharp decline in the FNB/BER consumer sentiment measure in the first quarter of 2025, driven largely by indications of a potential VAT hike which has been removed. 'While the VAT hike uncertainty has been resolved, the recent approved budget does continue to reflect continued fiscal pressures. Consumer sentiment is also impacted by the lower-than-expected inflation increases in house prices as noted in the FNB Property Barometer.' Mamello Matikinca-Ngwenya, chief economist at FNB, says the MPC's decision to cut the repo rate highlights a greater focus on domestic fundamentals. 'The outlook on interest rates will continue to reflect the risks. Should muted local inflation and expectations that the US Fed will resume its cutting cycle before year-end prevail, our current view that another 25 basis points cut is probable this year would be supported.' ALSO READ: Repo rate: Will Reserve Bank cut or err on side of caution? Low inflation and recovery in exchange rate to thank for repo rate cut Angelika Goliger, chief economist at EY Africa, says the decision to cut the repo rate was influenced by several factors, including South Africa's low inflation, a recovery in the exchange rate and declining fuel prices. 'Globally, the US Federal Reserve remains cautious due to uncertainties around government policies and their net effect on the economy, with only two rate cuts expected this year, starting in September. 'However, the outlook for US inflation has improved following yesterday's US Court for International Trade ruling that the reciprocal tariffs imposed under the International Emergency Economic Powers Act (IEEPA) by the Trump Administration are unlawful and subject to removal. By bringing more trade policy certainty, this could build a case for the US Fed to reduce rates sooner.'
The Citizen
19-05-2025
- Business
- The Citizen
Budget 3.0: Godongwana under pressure to make up for downgraded growth
With little room to manoeuvre, the minister of finance will have to cut government spending to balance the books in Budget 3.0. The global and local economic environment where Minister of Finance Enoch Godongwana delivers his budget speech on Wednesday afternoon will be very different from February when he tried to get the budget passed for the first time. He will now have to make up for the downgraded growth as well as the gap left by scrapping the VAT increase. Tertia Jacobs, treasury economist at Investec, says the two VAT increases of 0.5% each would have raised R75 billion in revenue over the medium-term expenditure framework (MTEF), a three-year spending plan used by government to guide its budget process. 'Scrapping the VAT increase makes it necessary to reduce government spending to maintain a neutral impact on the budget deficit. The focus now will be on where spending will be lowered and the ability of the government of national unity (GNU) to craft a way forward that both demonstrates its priorities and allows for consensus.' ALSO READ: Budget 3.0: Time to fix our economy – BLSA What has changed between Budget 2.0 and Budget 3.0? Jacobs says this has changed from Budget 2.0 to Budget 3.0: Global growth and South Africa's macroeconomic forecasts have been revised lower. A VAT increase is not available to finance an increase in new spending. The GNU is committed to stabilising the debt-to-GDP ratio. Operation Vulindlela Phase 2's agenda has been announced and Budget 3.0 will allocate more funding. There is additional cash from a higher closing balance and possibly the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) valuation, depending on a formulaic allocation which has to be agreed to. 'The May 2025 budget will be trying to balance new expenditure measures and lower tax revenue. The commitment to fiscal consolidation is likely to remain, with the debt-to-GDP ratio sitting uncomfortably at 76% of gross domestic product (GDP).' She says tax measures, such as the bracket creep that Budget 2.0 resorted to to finance new expenditure, are currently required to fill a potential shortfall in the baseline October 2024 medium-term budget policy statement (MTBPS) forecast, which exposes the main budget deficit to the political decision on how much and what types of new spending South Africa can afford. ALSO READ: Budget 3.0: will it be third time lucky for Godongwana? Clock is ticking to approve budget 'The clock is ticking and in addition, three bills in the fiscal framework must be passed. The Appropriations Bill must be finalised within four months of the start of the new financial year in April 2025. There is currently a spending cap of 45% based on the 2024/2025 budget. 'Funds withdrawn from the Revenue Fund may be used only for services for which funds were appropriated in the previous annual budget or the adjustments budget. Thereafter, it may not exceed 10% of the total amount appropriated in the previous budget,' she warns. Jacobs points out that the outcome for the 2024/2025 revenue and expenditure numbers are better now and these will be included in Budget 3.0, showing a higher closing cash balance of R15 billion. 'Gross revenue receipts were R9 billion better than the February 2024 forecast and R15 billion ahead of the October 2024 MTBPS forecast. The contributory factors were a meaningful improvement in corporate income tax collections of R16 billion more than expected and a larger withdrawal from the two-pot retirement fund system of R45 billion, which raised R13 billion in tax, although personal income tax missed the target by R9 billion. 'Sars's effort to improve efficiencies and compliance also played a role in closing the forecast gap and this effort is expected to become more prominent over the MTEF period. On the expenditure side, the target was missed by R6 billion. The implication is a higher closing cash balance of R15 billion.' ALSO READ: Economic activity slows in April as economy struggles Budget deficit slightly smaller Therefore, she says, the main budget deficit consequently beat estimates (of 4.7% of GDP) at 4.5% of GDP, as it declined from an estimated R356.1 billion to R336.7 billion. However, there are new macroeconomic forecasts in a changing global landscape, Jacobs says. 'South Africa's structural reform programme's manifestation in higher fixed investment is materialising only very incrementally. In April 2025, the IMF revised its global growth forecasts to 2.8% for 2025 and 3.0% for 2026, down from 3.3% predicted for both years. 'The Trump administration's policy agenda of raising trade barriers already caused upheaval in global financial markets, with a toned-down tariff version to be followed as bilateral trade and investment deals are negotiated. 'While a trade war between the US and China appears to have been avoided – a risk scenario that the markets moved to price in in early April – US trade tariffs will be higher and this will have an impact on global trade and economic growth in many countries in Europe and China, South Africa's major trading partners.' For example, she says, the weighted average tariff on US imports from China may have been reduced from more than 100% to 43% for the next 90 days, way above the 9% tariff increase in 2018/19. In South Africa, ICIB and Bloomberg consensus forecasts for economic growth have been lowered to 1.4%, from 1.9% and 1.7% in late 2024. ALSO READ: Minister of finance says no to wealth tax Budget 3.0 will also show National Treasury's updated GDP forecast for 2024 of 0.6% from its projection of 0.8%, with 1.9% in 2025 to be more aligned with market consensus. Inflation has consistently surprised on the downside in the past six months, leading to a revision in the market and the Sarb's inflation forecast. National Treasury's 2025 forecast of 4.4% (0.8 percentage points higher than the consensus of 3.7%) will also be lowered. For 2026, the market consensus is at 4.5%, with National Treasury at 4.6%. The combination of lower growth and inflation implies slower nominal GDP growth. National Treasury's 7.0% and 6.4% are too high compared to ICIB's projection of 5.1% and 6.0%, Jacobs says. 'The revision to the macroeconomic forecast lowers the gross tax revenue forecasts. Our analysis shows that when the October 2024 MTBPS revenue forecast for FY25/26 is used as the baseline forecast, tax revenues could be R35 billion less, when assuming a gross revenue-to-GDP ratio of 24.7% of GDP. 'We think there are two ways of returning the forecast to the October 2024 baseline. These consist of bracket creep of R18.0 billion, announced in Budget 2.0, with carry-over effects of R19.1 billion and R20.3 billion in the outer years over the MTEF and increased reliance on Sars.' ALSO READ: SA's economic growth outlook growing increasingly dim Spending challenge? 'The removal of a 0.5% increase in VAT this year and another next year, which would have raised R80 billion to finance new spending on frontline services, means a R75 billion spend shortfall which will have to be reprioritised or reduced. 'The carry-over total from bracket creep raises R58 billion over the MTEF period. The focus point is how spending on frontline services and infrastructure can be balanced, in addition to an above-inflation increase of 5.5% in public sector wages of R23.4 billion, other spending of R37.7 billion and infrastructure spending of R46.7 billion.'
