Wouter Fourie International adviser comment feb2020

South Africa budget: between a rock and a hard place

By Kirsten Hastings, 11 Feb 20

Four firms give their insights into what they want to see the government deliver

 

Finance minister Tito Mboweni “has a mammoth task ahead of him”, according to Delia Ndlovu, managing director: Africa tax and legal at Deloitte Africa.

Commenting ahead of the budget, which will take place on 26 February, Ndlovu outlined three questions the ‘Big Four’ accounting firm would like to see addressed:

  • What austerity measures is Treasury taking to keep expenditure under control?

  • What alternative mechanisms is government considering to increase tax revenue?

  • What plans does government have to revitalise economic growth?

An added pressure facing Mboweni is the risk of a downgrade from ratings agency Moody’s, which has been the only barrier between South Africa and triple junk status.

There were concerns that it would put the country ‘on watch’, in November 2019 – but this failed to materialise.

While South Africa’s outlook was changed to negative from stable, its Baa3 ratings were affirmed.

But Moody’s added that the it would likely be downgraded were the agency to conclude that “South Africa’s fiscal and/or economic strength will continue to erode”.

To get a better understanding of what the wealth and advisory sectors want to see from the budget, International Adviser reached out to firms on the ground.

 

Important, very important and critical

Peter Hewett, managing director of Hewett Wealth, said the country faces a host of issues, but he pointed to four “really critical” ones.

“The biggest challenge that we face in the near term is a bloated state and badly managed or non-viable SOEs [state-owned enterprises].

“We need to get rid of the SOEs that we absolutely do not need and allow the private sector to fill the gap and focus all our efforts and resources on fixing SOEs that we do need, like Eskom.”

The Electricity Supply Commission (Eskom) was set up in 1923 and is the largest electricity provider in Africa.

In 2019, it was announced that the company would be split up because of its huge debt levels and unreliable service.

It has also been at the centre of accusations that an incredibly wealthy family, the Guptas, used their friendship with former president Jacob Zuma to secure and control SOEs, including Eskom, for personal gain.

Another key change would be “to reduce bureaucratic impediments to doing business and relax a number of provisions of the Labour Relations Act to enable and incentivise businesses to employ people”, Hewett added.

“We need policy clarity on such matters as land ownership and national health care, as the uncertainty in this regard continues to do immense damage to the economy.”

‘Land expropriation without compensation’ is a policy which would see the government “reclaim” land under certain circumstances without payment. Understandably, it has caused a lot of concern.

The imminent expat tax legislation, which would make South Africa one of the few countries with citizenship-based taxation, “needs to be reviewed”, Hewett added.

“It is intended to be made effective on 1 March 2020 and this has encouraged a mass exodus of capital and scarce skills.”

 

Not always greener

Autus Private Clients describes itself as “stewards of a better future”, but the team remains acutely aware that amid “the current political and economic uncertainty in South Africa, change is inevitable and that it is not always greener on the other side”.

“For South Africa to show economic growth within the next few years, we will have to address the high unemployment rate, curb the payment of grants and focus on education.

“Increasing the tax brackets of VAT might enhance government income, but will be detrimental to the consumer,” the team said.

In a bid to encourage people to save and invest, Autus would also like to see:

  • No asset allocation restrictions (Regulation 28) in retirement saving products;

  • Increase the ZARR500,000 (£26,008, $33,711, €30,668) maximum allowable contributions in a tax-free savings account;

  • Increase the interest and capital gain rebates on discretionary investments;

  • No increases in VAT;

  • Remove capital gains tax in a deceased estate, because the deceased person already pays estate duty on their assets in their estate; and,

  • To keep income tax the same or decrease tax rates to encourage more consumer spending.

 

Retirement riddle

Carrick Wealth’s head of investment strategy, Anthony Palmer, told IA that he is “seeing clients over the age of 55 retiring into living annuities to avoid prescribed assets, even though they do not need the income”.

“I am also seeing clients changing their savings habits and investing offshore instead of their local pension, even though they lose the very favourable tax deduction and other associated benefits.”

Palmer believes that, “if prescribed assets are going to be a reality, then infrastructure projects need to be presented that will create jobs and boost the economy as opposed to bailing out SOEs”.

“South Africans are suffering a severe lack of confidence as their pension savings (prescribed assets) and primary residence (land expropriation) are often their two biggest assets.”

He would like to see the budget “send the world a clear message that South Africa has a plan”.

“At the moment, international investors are on the side lines with a ‘not now’ approach to investing in South Africa. We desperately need to boost confidence, which will also go a long way in holding off a Moody’s downgrade to junk status.”

 

Make things clear

Ultimately, Wouter Fourie, chief executive of Ascor® Independent Wealth Managers, sums it all up quite neatly.

“As a financial adviser and investor, I would like to see more clarity and certainty on the government’s policy direction.

“A clear policy direction will allow us to better plan for the future.”

He continued: “At the same time, we would like to see more aggressive and targeted tax incentives aimed at promoting job creation.

“South African businesses have a great deal of cash that is sitting on their balance sheets and we believe that they will invest more of this if they have the incentive to do so.

“Unfortunately, without policy certainty and guided job creation, we have a bleak future ahead of us.”

 

Long way back

There is no doubt that South Africa has a long, hard road to trek.

All of the indicators are that this could be a make-or-break budget, especially given the risk of a third ratings downgrade by Moody’s.

If that does happen, any recovery is going to become more arduous.

Global economic conditions are struggling to get to grips with the outbreak of coronavirus, compounded by Brexit and a highly fragmented US political system.

Trying to launch a new strategy in such stormy seas is risky.

But South Africa has no choice.

As the idiom goes; it is between the devil and the deep blue sea – at least economically.

 

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