Thriving Under Pressure
The phrase ‘thriving under pressure’ is one that many South Africans are familiar with. It reflects the resilience one needs to withstand stress and come out stronger on the other side. The 2023 National Budget presented by Finance Minister Enoch Godongwana on the 22nd of February 2023 once against illustrated the longstanding sense of lethargy that sees government waiting for critical matters to get extremely bad before addressing them. The risk that comes with this approach is that not all the important issues can be addressed adequately, and this has significant consequences for the national purse.
The 2023 National Budget was one of the most anticipated policy announcements given the highly uncertain global and domestic macroeconomic environment and South Africa’s anxieties around its energy security and the possible greylisting by the Financial Action Task Force. In this case, however, the government presented a congruent message to South Africans in line with the growth reform agenda. During the State of the Nation Address two weeks earlier, President Ramaphosa had emphasised the government’s commitment to create a sustainably inclusive growth environment that encourages private sector participation and enables fixed investment to support the ongoing recovery from the devastating and lingering effects of the pandemic, the ongoing Russia-Ukraine war, local floods, and deteriorating electricity supply. The sentiments embedded in the State of the Nation Address and the Budget Speech suggested that the current government is serious about turning around the misfortunes of the country.
Indeed, Finance Minister Enoch Godongwana had the difficult task of pleasing both investors and despondent South Africans with this Budget ahead of the 2024 elections. We highlight four key messages from the 2023 Budget. The first is that the government is serious about continuing with its fiscal consolidation path. The second is that it now can commit to the energy crisis and take tangible steps to restore energy generation and transmission. Thirdly, fixed investment will be focused on rehabilitating the rail, road, and ports infrastructure. Lastly, the government plans to continue improving state capability to ensure governance and rebuild the trust deficit between the public sector and the rest of the country. Prioritising these reforms will boost investor confidence, private sector expansion, create sustainable jobs, increase the tax base, and uplift the livelihoods of South Africans.
The National Treasury expects real GDP to moderate to 0.9% in 2023 before rising to 1.5% and 1.8% in 2024 and 2025 respectively. Given the low growth outlook, it is important for the government’s fiscal strategy to be maintained while providing relief to households and businesses for the impact of the cost-of-living crisis and load shedding effects using excess tax revenues. Both households and corporates are encouraged to invest in renewable energy, with households eligible to claim up to 25% of the cost of solar panel installation, limited to a maximum of R15 000 in rebates. Meanwhile, businesses will be able to reduce their taxable income by 125% of the cost of investing in renewable energy beginning 1 March 2023.
Other incentives came in the form of tax proposals for the forthcoming fiscal year. These include:
Importantly, the government remains steadfast on limiting unfunded expenditures such as the one-year extension of the Social Relief of Distressed grant, although it is not budgeted for beyond March 2024. The National Treasury expects the main budget deficit to reduce from 3.9% of GDP in FY2023/24 to 3.3% of GDP over the Medium-Term Expenditure Framework (MTEF) even with the proposed debt solution for Eskom.
Secondly, to address the energy crisis and reduce the severe electricity load-shedding the country has experienced thus far, the government will provide debt relief of R254 billion over the next three years to Eskom. Notably, this is not exclusively a debt transfer as it is more of a conditional loan that will convert to equity. The government will commit about R168bn in capital and R86bn in interest in the form of a subordinated interest-free loan provided in staggered advances of R78bn in FY2023/24, R66bn in FY2024/25 and R40bn in FY2025/26. In addition, the government will take over up to R70bn of Eskom’s debt obligations in FY2025/26. While the debt relief will only be used to settle debt and interest payments, the overall gross loan debt for the country will stabilise at 73.6% of GDP in 2025/26, before gradually declining. The risk of this outlook does not match both the growth outlook and revenue projections the National Treasury expects over the next three years. It also suggests that the government has limited trust in the implementation of the broader structural growth reforms and the impact they will have on growth over the MTEF.
Thirdly, the deterioration in infrastructure has contributed negatively to economic growth and requires immediate attention. The impact was more evident during the recent commodity price rally where mining export volumes could have been much greater but the limitations of transporting these minerals made it difficult for mining companies to benefit from the opportunity. The government is committed to improving our railways and ports to support South Africa’s strong export market by pursuing third-party access to transport and logistics, mainly the freight rail sector. In addition to the tabled Economic Regulation of Transport Bill in Parliament, the rollout of critical infrastructure projects is underway in water and sanitation, energy, and transport, amounting to about R134.2 billion in procurement, and R232.3 billion in construction.
Lastly, the government remains committed to strengthening state capability and this is seen through allocations made to reinforce the fight against crime and corruption. Further support is provided to address the State Capture Commission’s recommendations and to fortify anti-money-laundering and counter-terrorist-financing (AML/CFT) activities to limit losses of public resources through criminality and graft. The National Treasury announced that the Financial Intelligence Centre will receive R265.3m while the Special Investigating Unit will receive R100m over the next three years to strengthen the enforcement capacity and update the country's AML/CFT infrastructure.
Unfortunately, even with a relatively positive Budget such as this one, waiting till the last minute to address key growth-limiting issues has its consequences. On 24 February 2023, the Financial Action Task Force pronounced that South Africa and Nigeria would join 23 other nations on the grey list, becoming the only G20 member state to be placed under such scrutiny. Being placed on the greylist means that a country is deemed financially risky, as it has inadequate protections against the proliferation of money laundering and terrorist financing. To South Africa’s advantage, most of the nations on the greylist do not have the financial sophistication that our financial institutions have. This might explain the government’s bold ask of the FATF to reassess our AML/CTF laws by the next plenary in June 2023, which would be the shortest stint on record. On average, countries placed on the greylist spend about 2-3 years making amends to meet the FATF’s recommendations. However, a country like Mauritius took about 12 months to decisively address all the recommendations and reinforced existing AML/CFT laws working meticulously with the private sector.
Whether SA stays on the greylist for a year or more is less of a concern, the damage is already done. The effect on the macro economy includes enhanced due diligence for cross-border transactions, delays in executing trades, and higher monitoring and reporting costs, which will raise compliance costs. Essentially, the cost of doing business with SA increases further as moving money becomes more expensive with the potential risk of capital outflows which will result in the rand weakening and raise bond yields. Indeed the impact will be mostly felt by the financial services sector, and be apparent to businesses that have international dealings, but the impact on households will be indirect over time when companies eventually push those costs to their customers.
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Beyond the macroeconomic risks, financial professionals ought to be aware of the following issues.
Since the adoption of the June 2021 Mutual Evaluation Report (MER) followed by intensive engagements made in October 2021 and further on 13 January 2023 reviewing progress, South Africa’s anti-money laundering and counter financing of terrorist and proliferation (AML/CFT&P) regulators and supervisors made relatively significant progress in strengthening the adequacy and effectiveness of the current AML /CFT&P regime. Therefore, there has been intentional progress in reviewing and amending the current AML /CFT&P legislations/laws to amongst others, extend the “gatekeepers” which were deemed to be susceptible to Money Laundering and Terrorist and Proliferation Financing (ML/FT&P) risks as accountable institutions. The speedy enactment of these legislations implied that the business industry had more duties in curbing ML/FT&P risks than ever before. These amendments indicated a key initiative of making each economic role player accountable for curbing these risks and therefore essentially needing to play their part in assisting the Regulators and in turn the FATF.
With South Africa now under rigorous monitoring, and risk assessed at a country level, it is pertinent to note that there is a cascade of Business Risk Assessments that will need to be applied by key stakeholders and role players. These include but are not limited to accountable institutions such as reportable institutions, professionals, financial service providers, property practitioners, and commercial banks, as well as the economy at large.
The first point of action is in understanding that curbing ML/FT&P risks goes beyond principles enforced in legislation and certainly goes beyond the duties and requirements as set out in various pieces of legislation such as the Financial Intelligence Centre Act (FICA), Prevention of Organised Crime Act (POCA), Protection of Constitutional Democracy Against Terrorist and Related Activities Act (POCDATARA) and Prevention and Combating of Corrupt Activities (PRECCA). If the economy at large is not effectively applying the aforementioned legislations into their daily operations and embedding controls efficiently, then we aim to see quite a stagnant movement in curbing these risks.
What this implies from a business perspective is that businesses should already start putting plans to effectively address the eight (8) areas highlighted in the 24 February 2023 plenary. Ideally, if compliance was already embedded in the day-to-day operations, one should only be looking into refining its business risk assessments in line with the deficiencies highlighted.
Below we list the 8 strategic deficiencies and relatively what action plans businesses and professionals should put in place to address them:?
It is essential to keep in mind that AML/CFT&P forms part of the greater economic crime schemes, it is therefore viable to always allow and understand the predicate offenses that may lead to AML/CFT&P in the professional world. Examples include bribery, corruption, and fraud. The proceeds of these predicate offenses are what is essentially laundered using businesses and professionals as vehicles. It, therefore, starts mainly with business and the economic role players at large to curb these risks. Thus, striving for a sustainable and inclusive economy requires all South Africans working together.?
Khanyisa Phika ?is an Economist in the financial sector.
Lebogang Thobakgale ?is a Financial Crime Compliance Specialist in the financial sector. @absip