By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
There is no doubt that Treasury continues to face mounting spending pressures. Relative to the previous budget proposal, wage bill growth is higher, municipal debt and the spillover to Eskom's financial health remains unresolved, Transnet remains a material contingent liability, the financial strengthening of the SANDF is overdue, and the ceasing of humanitarian aid by the United States will create funding gaps that need to be catered for. The range of spending pressures need careful navigation to avoid lifting non-interest expenditure and delaying debt stabilisation materially. Such a route could gnaw at the positive sentiment towards SA, potentially dashing any hopes of a sovereign rating upgrade in the near term. However, a failure to resolve municipality and state-owned enterprise (SOE) financial constraints and service delivery could affect the economic growth trajectory that is also important to sentiment, revenue collection, and debt stabilisation. This explains Treasury's bind and the need to venture into tax increases.
This brings us to the Laffer curve, which is the relationship between tax rates to government tax revenue. The theory is that tax rates and government revenue have a positive relationship up to a certain rate of taxation where revenue collected starts to plateau, the revenue maximising point, suggesting that higher taxes become inefficient. In fact, further tax increases beyond this point start yielding negative returns on government revenue - this is when tax compliance starts to decline, and economic activity is hampered. Furthermore, tax increases (bar personal taxes) stand to raise inflation. The South African Revenue Service (SARS) commissioner has publicly suggested that SA has reached the point where tax increases have become inefficient, and recent empirical studies also support this argument. He suggests that an effort to improve collection efficiency would provide higher yield to government finances, but this would be another immediate spending pressure with a potentially lagged benefit.
Ultimately, government will have to balance spending pressures with weak economic growth and revenue collection, especially on the corporate and indirect tax front. Furthermore, the two-pot retirement withdrawal boost is not likely to last long. Economic growth and an expansion of the tax base will be Treasury's saving grace, but a loss of confidence in the fiscal trajectory would weigh on the outlook. Therefore, maybe even if the benefit of a VAT increase will be minimal, especially with the counterbalances afforded, e.g. a longer list of zero-rated items, it is symbolic of the limited fiscal room and the fixes that need to be made all at once but will have delayed benefits. In times like these, Treasury's communication needs to be well-poised, and a postponed budget is not the best start.
Week in review
After a revised 0.7% m/m increase in November, the leading business cycle indicatorreversed course in December, falling by 1.8%. The decline was driven by widespread decreases across most components, notably a slowdown in vehicle sales and fewer building plan approvals, with only job advertisement growth showing improvement. Nevertheless, the leading indicator still rose by 1.6% y/y, albeit moderating from 2.5% previously, marking the ninth consecutive month of annual growth. This aligns with our view of an economic upturn, with growth expected to recover from below 1% over the past two years to nearly 2% in 2025/26.
Headline inflation was 3.2% y/y in January, up from 3.0% in December. Monthly pressure was 0.3%, led by contributions from core and food inflation. Inflation should remain subdued in 1H25 before rising steadily into the second half of the year. We see headline inflation posting 3.4% in February and settling above 5% by the end of the year. This will be mainly on account of fading positive base effects and improving demand. Nevertheless, we currently anticipate that average inflation will be softer than in 2024. Risks to the outlook include a more robust normalisation in services inflation as well as a faster acceleration in administered price inflation, especially water services. In addition, any hike in the VAT rate would raise annual inflation. Furthermore, global policy uncertainty should weigh on emerging market currencies, including the rand.
Producer inflation was 1.1% y/y in January, up from 0.7% in December. Monthly inflation was 0.5%, the highest since April 2024, driven by increases in fuel prices and the costs of metals, machinery, equipment, and computing equipment. Vehicle prices also climbed by 1.3%, reversing three consecutive months of deflation. The 1.1% annual rise in producer inflation reflected upward pressure in food products (4.8%, up from 4.5%), a sharp increase in furniture and other manufacturing goods prices (7.1%, up from 5.3%), and a moderation in the contraction of petroleum-related product prices. Intermediate producer inflation, which tracks price changes of raw materials entering production, rose further to 7.3% from 5.8% over the same period.
Private sector credit extension (PSCE) saw a slight decrease in January, moderating to 4.1% y/y from 4.2% in December. This minor slowdown was reflected in both household and corporate credit, with household credit dipping to 2.9% (from 3.0%) and corporate credit to 5.3% (from 5.4%). Monthly trends, however, diverged. Household credit experienced its strongest monthly growth in approximately a year, rising by 0.5% m/m. Conversely, corporate credit reversed its previous growth, declining by 1.2%, from 1.2% growth.
Within household credit, unsecured lending continued to struggle, with loans and advances falling by 1.6%y/y. This offset the steady growth in credit card usage, which remained strong at 8.8%. Asset-backed credit was supported by car financing, though growth slowed slightly to 6.2% from 6.5%. Mortgage advances remained stagnant at 2.3%. On the corporate side, general loans and advances experienced a more significant slowdown, decreasing to 4.2% from 5.2%. Commercial car and real estate financing remained relatively stable recording 5.2% and 5.3%, respectively.
Week ahead
The manufacturing PMI for February will be released on Monday. The PMI declined further to 45.3 in January, down from 46.2 in December 2024, signalling continued weakness in the manufacturing sector. While the PMI business activity index rose slightly by 3.2 points to 43.5, it remained in contractionary territory, suggesting that manufacturing output may have remained weak at the start of the year. New sales orders increased by 4.6 points to 42.0 but continued to reflect subdued demand for manufactured goods. The overall PMI was weighed down by a drop in inventories to 46.5 from 50.7 and a decline in the employment index to 44.4 from 46.5. While the index tracking manufacturers' expectations of operating conditions over the near term fell slightly to 64.9 from 67.6, it was still higher than the 58.7 recorded in January 2024. This, alongside lower inventories, is consistent with our expectations of a modest recovery in manufacturing activity.
Data on new vehicle sales for February will also be published on Monday. New vehicle sales increased strongly by 10.4% y/y to 46 398 units, maintaining momentum from 4Q24. This was driven by an 18.3% increase in new passenger car sales to 34 530 units, supported in part by car rental sales, which accounted for 19.1% of the passenger car market. This marked the seventh consecutive month of annual growth in passenger car sales, reflecting modestly improved sentiment and reduced monetary policy restrictiveness. This trend is expected to continue as economic conditions improve, aligning with our macroeconomic projections. New commercial vehicle sales remain subdued due to a high base, but the pace of contraction is easing. In January, sales declined by 7.6% y/y to 11 868 units, following a 10.8% drop in 2024. Medium and heavy commercial vehicles, as well as buses, recorded growth in January, while light commercial vehicles and extra-heavy trucks saw declines.
On Tuesday, data on GDP for 4Q24 will be released. Real GDP unexpectedly declined by 0.3% q/q in 3Q24. On an annual basis, the economy grew by a modest 0.3%. The quarterly contraction was primarily driven by a steep 28.8% q/q decline in the volatile agriculture, forestry, and fishing sector, which deducted 0.7 percentage points (ppts) from GDP growth. Excluding this sector, the economy demonstrated resilience, expanding by 0.4% q/q and 1.1% y/y, highlighting the relative stability of sectors less exposed to climate and biosecurity risks. The economy has grown by just 0.3% y/y (non seasonally adjusted) in the first three quarters of 2024, and while some improvement is expected in 4Q24, it may be constrained by the performance of the productive sectors.
Nevertheless, some recovery will be supported by moderating inflation, employment gains, the liquidity injection from two-pot retirement withdrawals, and improved confidence. Growth is forecast to rise toward 2.0% in both 2025 and 2026, with further acceleration anticipated beyond 2027. This positive outlook is underpinned by continued improvements in energy availability, the stabilisation of logistics networks, and the execution of structural reforms.
On Wednesday, the RMB/BER Business Confidence Index (BCI) for 1Q25 will be published. The BCI saw a seven-point boost in 4Q24, climbing to 45 index points from 38 in the previous quarter. This positive trend, marking the third consecutive increase, places the index nearly 20 points above its recent low of 27 reached in 2Q23. The uptick in sentiment is driven by improved business activity and operating conditions compared to 3Q24. Moreover, businesses are optimistic about the upcoming quarter. This level of confidence is the highest since 1Q22 and is marginally above the long-term average of 43 index points. The improvement in the BCI was widespread, with only new vehicle dealers experiencing a decline in confidence. All other sub-sectors reported increased confidence, and three - wholesale, retail, and building contractors - even surpassed the 50-neutral level. Notably, all sectors, except new vehicle dealers, now have confidence readings at or above their long-term averages.
On Thursday, the current account balance for 4Q24 will be released. The current account deficit narrowed further to R70.8 billion in 3Q24 from R75.3 billion in 2Q24. As a percentage of GDP, the current account deficit was 1.0%. The improvement came despite a slightly narrower trade surplus on goods, which decreased from R179.5 billion to R177 billion (2.4% of GDP), but rather reflected a narrowing in the services, income, and transfer account deficit (SIT), from -R254.7 billion to -R247.8 billion (-3.4% of GDP). There was a decline in total export values, which was worse than the decline in imports, and both reflected lower prices and volumes. South Africa's terms of trade improved, highlighting a faster fall in rand-denominated import prices versus the prices of exports. This data suggested that the deterioration in the current account deficit for 2024 would likely be less pronounced than previously feared. However, logistical constraints remain a key hindrance to export growth and, alongside rising domestic demand, increases the odds of worse current account dynamics over the medium term.
Data on electricity generated and available for distribution for January will also be released on Thursday. Electricity production rose by 3.2% y/y in December 2024, moderating from a 6.6% y/y increase in November. Seasonally-adjusted output contracted by 1.4% m/m, more than reversing the 0.7% monthly gain in November and exceeding the 1.2% decline in October. For 4Q24, electricity production registered a mild quarterly decline of 0.5%, following 2.7% growth in 3Q24. This suggests that the electricity sector, along with mining and manufacturing, weighed on GDP growth in the final quarter of the year.
On Friday, data on SA's foreign exchange reserves for February will be published. South Africa's gross foreign exchange reserves increased slightly to $65.9 billion in January 2025, up from $65.5 billion in December. This was primarily driven by a rise in the value of gold reserves, which offset a decrease in foreign currency reserves. Special Drawing Right (SDR) holdings remained relatively stable, and the central bank's forward position saw a slight decrease.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 25 Feb | SA | Leading indicator | Dec | 112.8 | 114.8 |
| 26 Feb | SA | CPI % y/y | Jan | 3.2 | 3.0 |
| SA | CPI % m/m | Jan | 0.3 | 0.1 | |
| SA | Core CPI % y/y | Jan | 3.5 | 3.5 | |
| SA | Core CPI % m/m | Jan | 0.2 | 0.0 | |
| 27 Feb | SA | PPI % y/y | Jan | 1.1 | 0.7 |
| SA | PPI % m/m | Jan | 0.5 | 0.2 | |
| 28 Feb | SA | Private Sector Credit Extension % y/y | Jan | 4.1 | 4.2 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 3 Mar | SA | Manufacturing PMI | Feb | -- | 45.3 |
| SA | NAAMSA New Vehicle Sales % y/y | Feb | -- | 10.4 | |
| 4 Mar | SA | GDP % y/y | 4Q | -- | 0.3 |
| SA | GDP Seasonally Adjusted % q/q | 4Q | -- | -0.3 | |
| 5 Mar | SA | BER Business Confidence Index | 1Q | -- | 45.0 |
| 6 Mar | SA | Current Account Balance % of GDP | 4Q | -- | -1.0 |
| SA | Current Account Balance R billion | 4Q | -- | -70.8 | |
| SA | Electricity Production % y/y | Jan | -- | -3.2 | |
| SA | Gross Foreign Reserves $ billion | Feb | -- | 65.9 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 87,325.35 | -1.7% | 3.7% | 20.9% |
| USD/ZAR | 18.46 | 0.6% | -1.4% | -4.2% |
| EUR/ZAR | 19.20 | -0.3% | -2.3% | -8.1% |
| GBP/ZAR | 23.26 | 0.1% | -0.6% | -4.7% |
| Platinum US$/oz. | 950.94 | -3.1% | 0.1% | 8.0% |
| Gold US$/oz. | 2,877.52 | -2.1% | 5.0% | 41.4% |
| Brent US$/oz. | 74.04 | -3.2% | -3.9% | -11.5% |
| SA 10 year bond yield | 9.78 | -1.1% | -0.3% | -11.1% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.9 | 1.9 | 1.9 | 2.1 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.1 | 2.0 | 2.2 | 2.4 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.2 | 3.7 | 3.6 | 4.9 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 4.4 | 4.6 | 4.5 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 5.4 | 4.5 | 4.4 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USDZAR (average) | 16.40 | 18.5 | 18.4 | 18.5 | 18.5 | 18.9 |
