Crunch Time For SA? – the SA budget

Feb 22, 2019 | 0 comments

The SA budget was drawn up under severe pressure. The economy is extremely weak, with private sector profit margins under pressure, low capital investment, high input costs due to a weak currency, and generally poor business sentiment. New Finance Minister Tito Mboweni had his work cut out in trying to deliver a budget. It has to simultaneously acknowledges the seriousness of affairs after the rot of the Zuma years, and still maintains some optimism that the same ANC government, responsible for the mess, will be able to fix things under the new management. Tito Mboweni, President Ramaphosa and Public Enterprises Minister Pravin Gordhan. 

It appears that he succeeded in calming markets down, temporarily at least. It is now generally agreed amongst economists that he did enough to avoid a downgrade to junk status by credit agency Moodies (the last of the credit agencies that still rates SA’s debt at the lowest rung of investment grade). This in turn bolstered the Rand a little, giving welcome relief to the economy.

But all of this is temporary, and SA continues to circle the fiscal drain. Tax-revenues are low and the ability of the Receiver to collect has been blunted due to corruption and cronyism at SARS, as with all other parastatals. Furthermore, borrowing is maxed to the hilt, the ZAR is under pressure and SA remains on the edge of a credit downgrade.
At the centre of this maelstrom sits the IMF, that lender of last resort, when all else has failed. Few governments can survive the austerity that an IMF bailout demands, and hence the road to that eventual destination will be rough.

In the meantime (short term), there is much that can go critically wrong, even within days. The most pressing matter is the repair of Eskom, the national (and sole) electricity provider in SA. Eskom was brought to it’s knees by corruption, managerial ineptitude, technical incompetence and an unproductive, bloated labour force. It is not simply a matter of finding the money to shore up this behemoth. It is also a question of trying to get to the bottom of the technical ills that now has Eskom providing less electricity than it did in 2009 – but at 9 times the cost to the end user!

The picture is the same across nearly all 72 State Owned Enterprises (SOE’s), from SAA and Transnet and a once-proud Denel, through to Statistics SA and the SABC. Fixing corruption and wastage is one thing. Fixing incompetence and low productivity, and reducing a bloated civil service is quite another; especially in an election year.

At the same time unemployment stays bound above 27% (officially, at least), anchored there by a militant voting constituency of the ruling ANC: the worker unions. The latter are totally against a reduction in government employee numbers, restructuring of SOE’s or privatisation in any form.

As the election draws closer the ruling ANC will increasingly pander to the market-unfriendly policies sprouted by the populist left, led by Julius Malema’s EFF. Expect much fire, smoke and emotion, all of which will have a massive bearing on the value of the South African currency.

One serious matter concerns prescribed assets, where legislation is introduced to force retirement funds to invest in SOE bonds. Imagine the impact of a part of your underlying investment portfolio being sunk into the likes of SAA or the SABC? Other populist issues include the confiscation of land without compensation, and a new tax regime on foreign earnings.

The good news is that Zuma is finally gone. Daily revelations in the press is publicly lancing the boil of corruption and incompetence under previously trusted leaders and their cronies, and the national prosecuting authority (NPA) has seemingly been set free to do their job.

But is it too little, too late? Time will tell. Volatile time. Crunch time.

Those with retirement savings, such as retirement annuities, stuck in SA should be rightfully worried about the long term value of their funds in international value terms. 

If you are a South African living abroad and still have retirement annuities in South Africa, ask Claire for assistance today.