The medium-term budget policy statement (MTBPS) presented by Finance Minister Malusi Gigaba on 25 October painted a very bleak picture of the government’s finances.
The expenditure ceiling was breached by nearly R4 billion due to the SAA bail-out, there is a revenue collection shortfall of over R50 billion and our debt levels are increasing with debt-to-GDP ratio expected to rise above 60% over the next three years. Add this to a very low growth forecast and we have a perfect recipe for further downgrades to South Africa’s credit rating.
In June this year, all three major rating agencies indicated that they were concerned about poor economic growth prospects, an expenditure ceiling breach, contingent liabilities of State-owned enterprises (such as SAA and Eskom) and fiscal debt, among other things. These concerns have been exacerbated, rather than addressed, by the latest budget statement. A further downgrade for the country would result in further deterioration of economic growth as both business and consumer confidence fall.
Foreign investor confidence in South Africa as an investment destination would fall, resulting in the weakening of the rand. Higher inflation would be a reality. As we target inflation in South Africa this would mean higher interest rates, which would negatively impact both consumer spending and business investment expenditure. All in all, this means that economic conditions will be very tight in South Africa for the foreseeable future. Furthermore, there is uncertainty surrounding the outcome of the upcoming ANC leadership elections at the December conference.
What should you do?
The main thing is to not panic and to avoid any knee-jerk reactions. One needs to understand how these factors influence various investments. Research has shown that investors who stay invested for the long term do better than those who time the market frequently in the hopes of getting the best return. It’s next to impossible to successfully time the market consistently and most professional investors avoid it.
In terms of our currency, most of the bad news has already been factored into the value of the rand, which fell immediately after the announcement of the MTBPS. Any offshore investment should be done as part of a holistic financial plan that includes diversification, rather than a guess about the next rand movement.
Selling out of the stock market would have proven to be a rash decision as the JSE All-Share Index rose after the MTBPS, mostly due to the weaker rand. The bulk of South Africa’s largest companies earn offshore revenue and benefit from a weaker currency.
While government bonds are weaker, having lost capital value, the yields have increased. This means that for someone relying on income, South African bonds, or especially bank corporate bonds, could be more attractive.
Rather than making rash investment decisions, speak to your financial adviser about your specific needs and the solutions available through Liberty, which include:
- The offshore endowment plan
- The newly launched Liberty risk-profiled portfolios, which have a passive component in their construction
- A high-water mark guarantee feature that is offered on our Agile and Bold products, which allows investors to invest in riskier portfolios without significant downside risk
Our view is that the best way to handle this volatility and uncertainty is to continue to invest. We have a wide portfolio offering that should give clients the highest likelihood of reaching their long-term goals.
Key facts from the budget
- Projected tax revenue shortfall of R50,8 billion in 2017/18, R69,3 billion in 2018/19 and R89,4 billion in 2019/20.
- South Africa’s economic growth forecast for 2017 has been revised downwards from 1,3% to 0,7%.
Expenditure:
- Lack of expenditure cuts in the period (rising Public Sector wage bill).
- The largest part of expenditure (debt service cost) is forecast to be 15% of tax revenue collected.
- The expenditure ceiling:
- The previous budget estimate was a reduction of approximately R10 billion in 2017/18 and R16 billion in 2018/19.
- The ceiling has now been raised by R3,9 billion. Minister Gigaba indicated that a portion of Telkom shares would be sold in order to avoid a breach.
Lack of stabilisation of the debt-to-GDP ratio:
- Previous budget estimate was at 48% earlier this year.
- Forecasted above 60% over the next three years.
Rising fiscal deficit:
- This has increased from a previous budget estimate of 3,1% to 4,3% of GDP.
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