South African Budget was more bond than equity friendly

Mark Appleton, SA Strategy Head at Ashburton Investments.

Reduced fiscal deficit targets presented by Finance Minister Pravin Gordhan did not differ markedly from those envisaged in the Medium Term Budget Policy Statement presented in October last year. The deficit before borrowing is budgeted to reduce from 3.4% in 2016/17 to 3.1% in 2017/18 and to reduce further to 2.6% in 2019/20.

A new personal income tax bracket was introduced at a 45% marginal rate (for earnings of above R1.5m), dividend withholding tax was increased from 15% to 20%, the fuel levy was increased by 30c a litre and sin taxes were once again increased.

From a credit rating agency perspective, fiscal consolidation remains on track although there are still very real risks on the growth side of the equation, as there always are with tax hikes. It is therefore not anticipated that the agencies will view this budget in a negative light.

There is little doubt that the minister is doing what he can within a set of significant constraints. It is acknowledged that real economic gains are only likely to come from economic reforms which the budget is not tasked to deal with.

While fiscal consolidation and a potentially less negative credit rating outlook should be seen as positive for the bond market, the government plans to increase the quantum of bond issuance (mainly in the local market) partially to build cash to fund large redemptions in 2019/20. We regard the overall effect as neutral.

From an equity market perspective, the increase in the dividend withholding tax rate is a negative in that investors will get less out of their investments on an after tax basis. The non-growth approach of the budget is also a risk for growth assets. It is however recognised that the growth outlook for the economy as a whole is gradually improving and this will ultimately filter through to an improved earnings outlook.

We note, with some relief, that the corporate tax rate was left unchanged.