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How do countries go bankrupt?

‘How did you go bankrupt? Two ways. Gradually but then suddenly’.

These two lines, which appear in the Ernest Hemingway-novel ‘The Sun Also Rises’, encapsulate, for me at least, what is slowly but surely unfolding in South Africa.

We are in the ‘slowly at first’-phase of going bankrupt as a country, but at a later stage, not too far away, will we reach the ‘suddenly’ part of running out of cash. Some would say we’ve already reached that point.

The #FeesMustFall student unrest we witnessed last week at most of our campuses, Parliament and even at the Union Buildings, are seemingly unrelated symptoms of a much greater build-up of steam boiling under the surface. These sporadic and isolated incidents include the labour uprising and massacre at Marikana in 2012, the ongoing e-tolls boycott and several hundred incidents of social unrest around water, electricity and the provision of basic services.

But related they are and there is more to come.

For me they represent small but ever-growing fissures in the ground under our feet that are opening up as the financial pressures – brought about by years of economic mismanagement, corruption, lack of governance and government arrogance, to name just a few – build up steam.

What the end of the commodity cycle means

These pressures were still manageable when the commodity prices were in full bloom and the economy was growing at around 5%, prior to the Great Financial Crisis. Government revenue was pouring in, creating the illusion of a cash-flow that forever rises into the future. Ah, such bliss….

Those days now seem so far away. The commodity cycle peaked in about October 2011; less than a year later the first to feel the squeeze were the mine workers at the platinum mines who went on strike demanding an adjustment to their basic wages. They were met with a hail of bullets leaving 37 dead.

The e-toll saga in Gauteng is nothing else but a manifestation of middle-class anger directed at the financial squeeze they find themselves in. By itself e-tolls are not a substantial cost, but when taken into consideration with above-average increases in land taxes, medical aid fees, school fees, electricity and everything else, it becomes the proverbial last straw on the camel’s back. With e-tolls you have a choice to pay or not pay; that therefore became the weakest fissure and out burst the steam.

If government does not realise this and continues on its misguided current path, the pressures are bound to build up to a bursting point of volcanic proportions.

It also is a manifestation of the utter powerlessness experienced by middle-class voters who are being squeezed by rising taxes, levies, fees, medical aid contributions, cost of living and a host of other factors. There is a rage building up under normally placid and law-abiding taxpayers.

Mugged by a blue light gang

Let me give you a small example of what I’m talking about. I’m certain many will relate to this.

The other day, in rush-hour traffic near Sandton on the M1 North going to Pretoria, I sat in bumper-to-bumper traffic, when behind me one of our modern-day curses under the ANC government loomed large in my rear-view mirror: a blue light convoy, accompanied by about five JMPD vehicles.

Everyone was threatened, cajoled, sworn at and pushed aside as the convey came screaming past, sirens blaring. Woe betide anyone who did not react fast enough in the eyes of the gun-toting JMPD-traffic cops, so that the big and very important man/woman of ANC could come through. I watched with horror as the procession continued in the direction of Pretoria.

It left me breathless with an impotent rage and yet we as taxpaying citizens can do absolutely nothing about it. I looked at the faces of the motorists around me, black and white, and the same rage was clearly visible.

It may be an insignificant incident in the greater scheme of things, but this is the way an increasing number of middle-class taxpayers in the private sector are starting to feel about the government. For it is they who are feeling the economic pinch the hardest.

Government workers now the rich and privileged

Middle-class taxpayers in government have been earning salary increases at a rate of inflation plus 3% for many year now and have been promised increases of the same for the next three years. A cushy job in government is now the surest way to middle-class wealth for most South Africans. Much of that is the consequence of cadre deployment, among other things. Merit seemingly counts for very little in the greater scheme of things. Such is the power of the civil service that National Treasury had to allocate money from its contingency reserves – emergency money in other words – to satisfy the demands of government workers.

Middle-class taxpayers are not, generally, beating inflation with their salary increases. This can already be seen in new motor car sales, home sizes, travel and even medical aid membership – they are all shrinking. Middle class SA is under a tremendous amount of pressure. Over the weekend the Lever Institute at the University of Cape Town confirmed this trend.

As it is, according to economist Mike Schüssler, the average salary in government is now R241 000 per annum versus R196 000 per annum in the private sector. The bloated government salary bill lies at the heart of much of our financial problems at the moment. And what are we getting in exchange? Surly, sloppy service with attitude and if you can’t do your job, you employ a consultant.

There was a time that a government employee would accept a lesser salary (relative to the private sector), in exchange for job security, medical aid, housing allowance and a generous pension fund. It was in the private sector where you would make the big bucks but where you could also lose your job and/or business if things went pear-shaped.

In the current financial year SA will spend R550 billion on the salaries of all civil servants from local to national government, more than half of the four major taxes central government receives, namely VAT, personal income tax, company tax and fuel taxes.

People often ask me what a fiscal cliff is. Just open your eyes and observe. We are busy storming at one right now. A fiscal cliff is when your expenses keep on rising but your income suddenly drops away, leaving you with a massive debt to service.

The mystery of the 36 000 ghost workers

Our media is barely scratching the surface when it comes to the thievery and gross incompetence at local government level. All the North West municipalities, for instance, are under administration. It has become so common that reports of theft and maladministration do not even receive a mention anymore.

Last month trade union Solidarity released a report on the ‘ghost workers’ of the North West province, highlighting that at least 36 000 ghost employees have been drawing a combined amount of R19 billion in salaries in this province alone. R19 billion! This report received barely a mention in the media and one battles to find any discussion on it.

I feel like shouting: There’s the money for #FeesMustFall!

The education fee shortfall shouldn’t cost anyone a thing. Just stop the thieving and corruption and you have all the money for anyone who qualifies to go to university.

But in the end government will find someone else to blame: the private sector, the ‘privileged’ whites, the colonialists or the foreigners.

Government spending will be higher next year; so too the budget deficit, the wage bill as well as interest payments on government debt.

And all the time those pesky foreigners, the foreign debt ratings agencies, are waiting and watching.

Ratings agencies… such a western thing.

*Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached for ideas and suggestions at magnus@heystek.co.za.

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“36 000 ghost employees (in North West province) have been drawing a combined amount of R19 billion in salaries”. When I read this, I nearly fell of my chair. Absolutely shocking!

…and then we cut off the best part of > R4 billion per annum in foreign earnings by throwing enough red tape at prospective tourists to make them give up on visiting our shores and take their money elsewhere.

ANC Economics 101: Spend more, earn less!

Excellent article Magnus.

Excellent article. If this lot would just stop stealing, wasting, buying toys they don’t need (ie arms deal) the list is endless we would be awash with money.
Free education all round but unfortunately some one in government would spot the extra cash and start the stealing all over again.
The debate over fees in parliament yesterday was once again comedy show played by a bunch of totally disconnected buffoons. A classic case of the left hand being clueless as to what the right hand was doing.

Magnus stating the obvious in a good article. When will Africa ever learn from their mistakes ? The fossil called Bob in our wonderfully bankrupt Zimbabwe showed us exactly how to bankrupt a country by treating the income earners badly. You can only cut so deep into the pockets of those that invest, spend and live in your country before the taps run dry. Leadership entails recognizing a problem and acting on it. An unbalanced budget needs to be balanced, and fast. Unfortunately Africa will have to learn the hard way, again, and again and again.

well sorry to be the bearer of bad news – BUT countries don’t go bankrupt! this is what Keynes told president Roosevelt during the great depression of 1930’s. it was true then it is true now. what happens is a slow grind downwards – until overseas investors and lenders say NO MORE. that is when the local govt starts printing money – which is exactly what happened in Zimbabwe. the idea of going bankrupt is that all your debts get written off you get an administrator in and presto 3 years later – good as gold. NOPE that is not going to happen – just a slow and ultimately fatal decline into the depths of economic depression. but tell people walking their dogs on the sea point promenade or dining at the waterfront that – they will think you mad!

Robert if you want to comment come back and help us sort it out.

one of my south African clients said to me “the problems in south Africa are too big to be solved by people like you or me”. and that was after mandella was released! these problems are of such a magnitude that they cannot be sorted out by “normal” means. however WHEN the EFF is in power (and based on the 50,000 turnout they got in joburg that may not be too far away). I may consider returning. I wld be able to live like a “zuma” on my paltry uk pension – which barely keeps me in gin and whicky in aus!

What you are describing is happening in all countries in the world. How many of the developed countries can pay their debt and their future social commitments?

The expansion off debt in developed countries is covered by their status as developed: developed infrastructure, developed education, developed financial systems, developed international industries, (Apple’s profit for the last quarter could finance SA for a year) a history of being able to withstand crises and as a consequence their interest rates on treasury bonds is low.

Conversely, we will be heading down the road of high-interest loans which we will not be able to maintain. At that point no miracle will help and we will descend into the Zimbabwe scenario of printing money with no infrastructure backing as outlined above. Inflation will spiral and the rand will become more funny money than it is now.

You are correct and contrary to what beachcomber believes a number of developed countries have ailing, crumbling infrastructure that is going to take huge sums and many years to repair and upgrade. They also have floundering education systems. At the same time South Africa is noted for the sophistication of its financial systems. Of course South Africa has many problems which it may or may not tackle and solve, but no-one can make any reliable predictions.

Beachcomber – history shows that the USA has defaulted or restructured its debt more times than SA. Fiat money without fail gets every government in the world into trouble eventually. This time is not different.

and what happens to people’s biggest investments being either their pension funds or property portfolio if you have your cabin in this sinking Titanic? It may be worth the while investigating how financially educated people are not investing in SA but taking their capital offshore and how this impacts the capital available for SME’s

Magnus, look at the bright side, we have over 9000 species of Fynbos that doesn’t grow anywhere else in the world!

And if we can export the one that is being legalised in the USA we will be able to pay off the national debt by the end of the year.

Depressing reality…. We are heading for a Greece like scenario, but the only difference is, we don’t have a big brother (like the EU) to bail us out. We will have to approach the IMF with a begging bowl, and their loans will be with strict conditions.

The next 2-3 years in South Africa will see us reach a breaking point, and many people simply have no idea whatsoever.

robertinsydney. Are you a south african that did ran away in 1994?. Why do you always have a comment on things going on in our country. Agree with pwgg if you want to help get on the plane and come home and do something.

If he’s in Australia he should be worried about how well they’re going to weather their own mounting storm.

from the mouths of babes. countries DO NOT GO BANKRUPT! the us$ is the world’s reserve currency – so all America has to do is monetise its debts (you may have to google that). japan debt is almost entirely local and when I last looked – Germany (which is the main pillar of the EU) had a massive gdp credit!

I thought about this “mounting storm” for sometime – and finally it dawned on me – you mean the ALL BLACKS on Saturday- and you are spot on. it will be a storm and I accept that ONLY if the wallabies have ALL their players to their top level can we win. my concern is that we played like that against the poms and whether we can do it again 4 weeks later – may be a “bridge too far”

Lol, “all they have to do is monetise its debts”. Yes that will go down very well. The consequences of that isn’t much better than a default.

yes I answered pwgg (see above). when a TRUE democratic political party is in power I may consider it. anyway I will be voting for the EFF in the next election – and at the moment that’s all I can do to assist change in my erstwhile country

Ja you will be voting for the EFF while living in AUS and we need to bear with them. You can be sure that if they govern this country there will be nothing left for you to come back to. Rather stay there we don’t need people like you

Oh Robert, are you still posting from afar….stay there and be quiet!

Baie goeie artikel Magnus.

Wat ek nog steeds nie kan verstaan, almal( insluitend die private sektor ) sien die “dinge” raak maar niemand doen iets? ?

I think it is more a case of being helpless to do something about it Chev! THe ANC votas will continue voting even when SA is burning and in ruins.

You right…everyone is “moedeloos”

All countries with a reserve bank and a fractional reserve banking system eventually goes “bankrupt” as you put it. The oldest currency, the British Pound, is only 400 years old. Where did all the older currencies and countries go?

SA is on the road to “bankruptcy” for sure, but ahead of us are the USA, Europe and Japan. Their dept to GDP ratios are at least double ours. The local banking system is the healthiest in the world. The JSE is the best-regulated exchange in the world. We have got a state-of-the art financial system but a lot of hooligans in government. It is like having a monkey behind the wheel of a Maserati!

We can only do what wealthy people have been doing for ever – protect your capital from inflation by owning assets that rise with inflation. The Zimbabwean stock-exchange was the best-performing exchange in the world during the times of hyper-inflation.

Strap in and enjoy the ride!

It is easier to blame the whites than to actually fix the corruption

Isn’t this all part of the ANC’s grand plan to impoverise the previously advantaged.They don’t vote for them but pay most of the taxes.What’s going to happen when they’ve all either passed on or left the country? Where is the tax base going to come from then!

The ANC could not give a damn about the future. They are hellbent on stealing as much as they can whilst they still can.
The future?? Dis iemand anders se baby!

When the Zuma lot in the ANC crowded out Mbeki and his team, I likened this to Pride Rock in the Lion King movie when King Mufasa was killed and Simba was chased out of Pride Rock. Remember that the hyenas took over the rule together with Scar but they knew nothing about anything. They pooped everywhere including the water they were supposed to drink. And in the end Pride Rock became a rundown place where life was impossible. There we go. We are in the deep pooh now.

Who is going to rescue us if not ourselves? And by the way I am black and I used to vote the ANC until when they chased Mbeki out…

FOR WHOM ARE YOU GOING TO VOTE IN THE NEXT ELECTION?

I don’t know for who I will be voting?
I don’t think it will help to vote for DA?
Maybe a breakaway political party from ANC will be the answer……NEWANC??

What we need in SA is a strong opposition. I don’t think the EFF is that. I believe they (EFF) will also destroy like the ANC does and the only other party is the DA. Maybe we need to give them a change and see what they come up with. If they don’t perform we can give another party (new ANC) a change in 5 years time

Not to criticise any of the author’s main arguments, but please check the facts Moneyweb. The NW ghost workers milked R19bn? That’s definitely NOT what the Solidarity report says. It says the TOTAL salary bill for the province is R18,3bn (58% of the province’s entire budget). There are 36 000 ghost workers ESTIMATED to earn R25 000 each (long shot, in my humble opinion), bringing the estimated/thumb suck amount to R900 million. Still doesn’t make the existence of ghost workers less shocking.
I totally agree with the author. That’s why I find it disappointing that a viral article (1.9K shares) — highlighted as the Editor’s Pick — on a finance website can get the figures so completely wrong where an amount like that should have caused alarm bells for any sub editor. This will (unfairly) be used to rubbish all the author’s valid arguments.

In fact, to illustrate how far off the mark that R19bn guess is… The total budget for the North West Provincial Government for 2014/15 was R31.8bn. That’s a fact. http://treasury.nwpg.gov.za/documents/speeches/2014/2014%20Adjustment%20Budget%20Tabled%20Speech.pdf
There is not a single mention of “R19bn” in Solidarity’s report as the author claims. Their (extremely improbable, given the facts) guess is R900m per month.
The only “news” outlet I can find that conjured the same figure (R19bn) as Moneyweb, is Praag. http://praag.co.za/?p=34798

Don’t slit hairs or billions.

Never mind the debt rating agencies, its the IMF and the global vulture funds that do the real damage at the end.

End of comments.

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