February 15, 2018 / 9:53 AM / 3 months ago

New-look South Africa to harness growth, skirt Moody's rating cut - Reuters poll

JOHANNESBURG (Reuters) - South Africa’s new leadership will need to be prudent and creative in managing the economy to avoid a credit rating downgrade, by raising taxes without suffocating a chance for growth, a Reuters poll found.

FILE PHOTO - South Africa's President Jacob Zuma, who is also the president of the ruling party, the African National Congress (ANC), gestures as he arrives for the party's 104th anniversary celebrations in Rustenburg January 9, 2016. REUTERS/Siphiwe Sibeko

Jacob Zuma reluctantly resigned as the country’s president late on Wednesday on orders from the ruling African National Congress (ANC), bringing to an end nine scandal-plagued years in office.

Taken between Feb. 9 and 14 in the days before Zuma stepped down, the poll published on Thursday concluded Pretoria was likely to dodge a downgrade in a review by ratings agency Moody’s due next month.

“If people believe it’s a Cyril Ramaphosa budget, I think they can just get away with it,” said Gina Schoeman, economist at Citi.

ANC chief whip Jackson Mthembu said parliament would elect Ramaphosa as the country’s new president at 2pm (1200 GMT).

Moody’s said in December that the election that month of Ramaphosa as the ruling ANC’s new leader opened up tentative prospects of a policy shift and rise in business confidence.

The poll suggested the treasury will need to weigh its options on raising tax revenue very carefully before implementing the budget, which is due on Feb. 21.

Economists were split on how new revenues should be raised - the most popular being an increase in income taxes, followed by higher value added tax (VAT), the sale of non-core assets and taxes on specific goods.

Economists said a 2 percent VAT hike could be effective in wiping out the 50.8 billion rand ($4.3 billion) revenue shortfall announced for the previous financial year in October.

FILE PHOTO - Shoppers walk during the opening of the 'Mall of Africa' in Midrand outside Johannesburg, South Africa April 28, 2016. REUTERS/Siphiwe Sibeko/File Photo

But it ran the risk of adding a heavy financial burden to the daily lives of the poor, while any rise in income tax, especially at the upper end, needed to be modest enough to encourage compliance among the super-rich, economists said.

“If you distribute the pain accordingly across the economy in different times and different ways, that type of creative thinking to revenue-raising is something the markets, bondholders and investors will likely take to,” said Citi’s Schoeman.

Still, economists expect the budget to project a deficit of 3.8 percent of GDP for the year starting in March, narrowing to 3.5 percent in the following year and further to 3.3 percent in the 2020/21 financial year.

“(The problem) is that you cannot push taxes too much because it can come back and bite you in the form of lower tax revenue, tax morality,” Schoeman added.

Inflation is expected to average 4.8 percent this year and 5.2 percent in 2019, below last month’s medians of 5.1 and 5.4 percent.

An easing of price pressures will give the central bank room to cut the repo rate by a quarter of a percent to 6.50 percent in May, the poll found.

It pegged economic growth at 1.4 percent this year and 1.7 percent next, a 0.1 percentage point rise from last month’s consensus.

“The bulk of that growth is a cyclical upturn, that comes from a greater margin of propensity to consume and invest,” said Schoeman, adding it was still early to accurately gauge business confidence levels.

(For other stories from the Reuters global long-term economic outlook polls package)

editing by John Stonestreet

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