Minister of Finance Enoch Godongwana must use the priorities of the State of the Nation Address (Sona) and focus the 2022 budget on that which will grow the economy and create jobs in real terms.
This he could achieve by allocating more funds to manufacturing and production that will include multiple industries as diverse as the future of automotive industry, chemicals, electronics, healthcare and textiles. Godongwana must ensure commitment to the priorities of President Cyril Ramaphosa to realise a Buffalo Miracle growth.
The chief cause for South Africa’s deteriorating public finances is that the economy is barely growing and recently, the pandemic that has wiped businesses that are expected to contribute to Corporate Income Tax and sustainable job creation. Strengthening the macroeconomic framework to deliver certainty, accountability and managing the government debt to GDP at reasonable levels 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 worsened the fiscal position in 2020 and 2021, the State-Owned Enterprises (SOEs), whose operational and financial performance deteriorated to complexity levels. Government debt to GDP is estimated to have reached almost 94 to 100 percent of GDP in 2022.
Private investment would gradually pick up as Covid-19-related uncertainty eventually moderates. In the medium term, growth is projected to ease to 2.4 percent in 2022, capped by structural constraints to investment, prevailing policy uncertainty, the possible elective conference and elevated government debt, which will hinder job creation.
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Godongwana is expected to allocate a higher percentage of the budget to economic development, covering special economic zones (SEZs), agriculture and agro-processing, light and heavy manufacturing, technological advancement and infrastructure development projects, and that can boost economic growth, economic development and job creation.
The second highest percent must be allocated to service government debt to GDP, which ranked higher on the 2020 and 2021 budget allocation. The Minister of Finance is not expected to increase Corporate Income Tax and Personal Income Tax in 2022.
The SEZ program is aimed at attracting foreign direct investment (FDI) to increase firm-level investment and improve firm-level productivity by enhancing firm-level coordination, networks, 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 corporations) are particularly sensitive to host countries taxation, that this sensitivity appears to be greater in developing countries than in developed countries, and that this sensitivity becomes even more significant over time.
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The objective of the SEZ policies is to attract foreign direct investment (FDI) to drive growth. Therefore, Antswisa Transaction Advisory Services expects the Minister to review and align tax incentives to investors interests as SEZs main goal is to attract foreign direct investments through lower tax incentives and other infrastructure benefits to investors, and that will enable the SEZs to create highly needed jobs.
Trends in FDI flows tend to reflect the level of confidence investors have in political and economic conditions within South Africa. Within limits, it can therefore serve as a barometer of a South Africa’s perceived stability, both in political, economic and social terms, and to what extent it is believed that governments and investors have the capacity to manage potential risks.
Godongwana must give confidence to the nation on the South African Debt Restructuring Mechanisms and the agreed revised repayments terms to annually, as International Monetary Fund expressed concerns about South Africa’s outlook that remains precarious.
Godongwana is expected to allocate to a balanced SA Energy Mix and State Owned Enterprises. It would be stunning to hear the post pandemic economic strategy for a State Owned Bank and Sovereign Wealth Fund.
Miyelani Mkhabela, CEO and Chief Economist at Antswisa Transaction Advisory
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