South African banks deliver mixed verdict on budget

An analyst says that there has been a “mixed response” to the South African budget among the country’s banks and financial institutions, which was put forward last week after a month-long delay owing to splits in the government of national unity (GNU).

The African National Congress (ANC) and its finance minister Enoch Godongwana were at loggerheads with its coalition partner, the Democratic Alliance (DA), in the weeks running up to the budget over controversial plans to raise VAT from 15% to 17%. There were also fears from some in the DA, which sees itself as a pro-business party, that the ANC could seek to hike other taxes and potentially dent investment and economic growth.

By way of compromise, Godongwana suggested in the budget raising VAT to 16% in two stages. Other measures include freezing personal income tax thresholds, meaning that earners will pay higher taxes in real terms as salaries have increased in line with inflation.

The budget was watched closely by South Africa’s banks, which posted strong revenue growth last year because of the country’s improving macroeconomic climate and stabilising political environment.

Menzi Ndhlovu, political and economic analyst at Signal Risk in Cape Town, says “the response to the budget among South Africa’s banks has been pretty mixed” and there are both potential risks and opportunities for financial institutions.

“On one hand, we didn’t see any increases in capital gains taxes or capital-related taxes, nor did we see any attempts to restructure debt, neither of which are good for banks,” he says. “This insulates them from short-term losses or liquidity constraints.”

“But on the downside, some of the measures in the budget could sap consumption and credit growth. The bracket creep [freezing of tax thresholds] that has been implemented by the finance minister could in particular sap demand for credit,” Ndhlovu tells African Business.

“At the same time though, South Africa remains a credit-happy economy – microcredit is a booming business and a booming offering among banks. This could allow banks a way to relieve the financial squeeze on consumers and small businesses and generate revenues.”

The market reaction to the budget was relatively muted, which Ndhlovu believes suggests financial institutions are “neither sad nor happy.”

Indeed, the share price of Standard Bank, South Africa’s biggest bank, rose slightly following the budget announcement last week, as did that of FirstRand and Absa Group. The South African rand (ZAR) has traded stably against the US dollar in the days following Godongwana’s budget speech, while yields on ten-year government bonds are also flat.

“Banks have been reassured by the limited moves we saw in South African bonds and in the rand – they haven’t responded as badly as one might have expected given some of the political uncertainty around the budget,” Ndhlovu says.

South Africa’s banks have thrived in the last year partly because of increased political stability following the formation of the GNU. The credit ratings agency S&P Global upgraded its outlook for South Africa from “stable” to “positive” after the election and said that this “reflects our view that increased political stability following the May general elections an impetus for reform could boost private investment and GDP growth.”

Given this, Ndhlovu tells African Business that “the biggest concern for banks regards political fragmentation within the ruling coalition.”

“However, in many quarters this has been quite overstated. Coalition governments are not smooth and never have been smooth. The negotiations we saw prior to the budget are part of the process that comes with a coalition government and should be expected,” he adds.

“The political situation is manageable. There is an appreciation of the economic risks that come with political fragmentation and there are strong incentives for both parties to stay together in order to minimise risks.”