South African Finance Minister Tito Mboweni painted a bleak economic picture in his supplementary national budget presented on Wednesday 24 June 2020. As South Africa slowly opens up its economy, subsequent to one of the longest and strictest COVID-19 lockdowns on the globe, the scale of devastation wrecked by these measures, on an already struggling economy, are becoming apparent.
“From an economic perspective we are in unchartered waters.” says Sanisha Packirisamy, economist at Momentum Investments.
“Treasury is forecasting a budget deficit of 15.7% of gross domestic product (GDP) for FY20/21. This is driven by a forecasted ZAR299 billion revenue shortfall and an additional R43.2 billion allocation to expenditure. The fiscal deficit is also expected to be 4.2% wider on average in the medium-term expenditure framework (MTEF) between FY20/21 and FY22/23.”
This deficit will have to be funded with debt and South Africa’s gross debt ratio is expected to rise to 86% of GDP in FY22/23 (previously 71.6%). On average the debt ratio is expected to be 14.5% higher over the MTEF.
“Our debt levels are unsustainable,” continues Packirisamy. “Debt-service costs absorb 21c of every rand government collects relative to 9c in FY08/09 and our interest bill is expected to rise from 4.9% of GDP in FY20/21 to 5.4% of GDP in FY22/23. To put this into perspective, the allocation to debt-servicing costs is now similar in size to what government spends on health and is double the share being spent on capital assets.”
Treasury also announced that it is accessing US$7.0 billion (ZAR118bn) from international finance institutions to finance the COVID-19 stimulus package. Packirisamy explains that this comprises a US$4.2 billion Rapid Financing Instrument from the International Monetary Fund, US$1 billion from the New Development Bank and US$50 million from the World Bank. No detail was given on how the remainder would be funded.
“What is of particular concern is the fact that there does not seem to be a concrete plan of action on proposed structural reforms to get us out of this quagmire,” notes Packirisamy.
“Little detail was given on the current negotiations between government and the unions on the public sector wage bill, for example, and we are no closer to understanding what the zero-based budgeting approach treasury is expected to adopt looks like.”
What complicates matters further she notes, is that state-owned enterprises (SOEs) and municipal finances remain in disarray. Metropolitan municipalities reported that revenue collected in April fell by 30% on average as a result of higher non-payment by customers and this places local governments deeper in financial stress.
“In terms of our SOEs, the February 2020 national budget already included an additional ZAR16 billion allocation to SA Airways and another R10 billion may come through in the October budget, once the business rescue plan has been finalised. A R3 billion equity injection into the Land Bank was also announced by the finance minister. However, despite lockdown restrictions lowering revenues for the majority of SOEs, no other intra-year spending adjustments were proposed.”
Treasury did note the SOE reform included rationalisation and equity partnerships, but the market remains sceptical about the political will required to facilitate these changes.
“In terms of recovery, infrastructure spending is at the centre of government’s economic recovery plan. However you need investment to facilitate this and South Africa’s investment-to-GDP ratio tanked to 17.9% in 2019, which is the lowest since 2005,” Packirisamy continues.
“The significant ramp up in projected debt and issuance will likely add to pressure for further sovereign rating downgrades, which in turn will make it more expensive to borrow, put downward pressure on the Rand and compound our already precarious financial position as a country.”
“Against this backdrop we are urging our clients to prepare prudently for tough times ahead,” says Bertie Nel, Head of Financial Planning and Advice at Momentum Consult.
“The reality is that it may get worse before it gets better, particularly given that treasury has hinted at increasing taxes in order to pay for our escalating debt, unemployment is rising and many businesses are closing down.”
As a point of departure, Nel, recommends that clients revisit their financial plans and strategies for both individual life as well as that of their businesses.
“In uncertain times like these it is important to ensure that life, disability and critical illness cover, income protection, short-term insurance and health protection benefits like health cover and gap cover are in place.”
He also stresses that it is important to manage your income and expense requirements in drafting a detailed budget, and be disciplined in executing on this.
“We recommend that our clients compile a list of asset and liabilities, and refrain from incurring debt in these times.”
“Clients should also guard against disinvesting or cancelling investments, especially those earmarked for retirement and other predefined needs like studies of children and emergency funds,” Nel continues.
“Take the opportunity to revisit your investment portfolio and align the composition to your needs and investment goals. Crucially, partner with a trusted, competent financial adviser that is specialising in financial planning and refrain from being “bullied” in product selling where one benefit is replaced with another.”
“The right adviser will help you to be prepared, remain calm and make informed and well thought through decisions, which will ultimately help steer you through these troubled times,” Nel concludes.