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SA running out of other people’s money

‘The problem with socialism is that you eventually run out of other people’s money’ – Margaret Thatcher.

This clever little bon mot, generally attributed to Baroness Margaret Thatcher – the former British Prime Minister who almost single-handedly destroyed the powerful but destructive mine-workers’ unions in the United Kingdom – sums up the current state of affairs in South Africa. Or at least, as far as our fiscal matters are concerned.

I would suggest that we now have officially entered that ‘running out of money’ stage. It could also explain this desperate search for more places to plunder by certain execs in the ANC.

Underlying all of what you have been reading and hearing over the past year or so, is this simple but inescapable truth: ever since the collapse of the global commodity cycle since late 2011, SA has been slowly but surely running out of money. It took a while for the full effect of this collapse to filter through into company turnovers, profits and hence revenue collections, but it now has.

SA’s revenue collection over many years has been quite sterling. Year after year we were treated with the luxury of revenue overshoots. Those days are now gone.

What was paraded as revenue-collection efficiency was pure luck in many instances. We have no control over the global commodity cycle and are price-takers, not -setters.

Budget collections under target

Almost unnoticed in between all the latest upheavals and shenanigans surrounding beleaguered finance minister Pravin Gordhan, was the announcement in Parliament by the South African Revenue Service commissioner Tom Moyane on August 23, that SA’s revenue collections are running way behind budgets, to the tune of R4.5 billion for the first three months of the current financial year, which started on March 1 2016.

Now R4.5 billion might not seem that much but if this trend is not reversed soon, that number can grow and grow, like Topsy, to a R20 billion or R30 billion hole, which will be difficult to fill. You will need to tax many more things than just sugar or tax-free loans by trusts, two of many possible taxes being contemplated right now.

By October, when the medium term budget has to be delivered by whoever happens to be our minister of finance, we could be facing down the proverbial barrel of the gun, with no obvious way to increase loans to plug the hole. SA’s budget deficit in 2015/16 was 4.2% of gross domestic product (GDP) and, in his budget speech earlier this year, Gordhan undertook to reduce the budget deficit to 3.2% in 2016/17 and even further to 2.4% of GDP in the following fiscal year.

If current trends in the economy and hence revenue collection continue or worsen, these optimistic targets will fall by the wayside.

An analysis of the revenue collection for the quarter to end-May show a surprising, perhaps once-off, overshoot in VAT collections (R2.6 billion or 5.6%) – not because the economy is robust (which it is not) but rather due to higher-than-expected claims from finance, manufacturing and wholesalers.

Personal income tax was almost R1 billion under target already (1%) while fuel levy collections were 2.9% under target; sure signs that consumers are using their cars less.

Interestingly, revenue collections on cigarettes were R320 million (or 3.6%) less than provided for in the budget. Is it because people are smoking less or are the sky-high taxes on cigarettes encouraging the smuggling of cigarettes which evades any taxes? You decide.

Worse to come

Economic news for the second quarter (June-August) don’t augur well and most likely will produce an even-worse fiscal picture.

The economy is in a serious funk. Motor car sales have fallen off a cliff, activity in the residential property market is like slow-moving treacle. The growth rate for the calendar year is not expected to be much higher than 0.5%. And this is the positive view.

While there might be one or two lone economists seeing some kind of economic rebound, I am not one of them.

In fact, one potential scenario we face is the following: Gordhan fired, rand tanks, business and consumer confidence – already at 15-year lows – falls even further and both our bond and equity market experiences a withdrawal of massive foreign investment. And oh, did I mention we get downgraded by one, two or even three global credit ratings agencies?

As the year moves relentlessly forward to the end of the year and to our possible date with financial destiny, it looks increasingly likely that a ratings downgrade has already been baked into the pie.

Gordhan has not been able to spend much time and effort to introduce fiscal measures which would assist in avoiding the fast-approaching cliff. He has been far too consumed in his faction fight with his erstwhile comrade in arms Zuma, who seemingly wants to see the back of him, away from the financial levers which controls the flow of money into this R1 trillion-a-year revenue economy.

Downgrade unavoidable?

Such a nightmare scenario is being downplayed, I feel, by most segments of our media and the economists working for the large banks and asset managers.

They are, as I have written before, under pressure not to be too candid and honest about the ANC’s handling of the economy and its prospects. It can be career-limiting if you are receiving a pay-check from a fund manager who does a lot of business with government.

They tend to reserve their honest appraisals for off-the-record and not-to-be-quoted discussions.

We’ve seen what happened to Paul Harris from FNB, who some years ago tried to initiate a campaign against the spiraling crime situation, which was cancelled at the last minute as a result of pressure from government.

Andrew Canter from fixed-asset fund management company Futuregrowth tugged the proverbial tiger by the tail last week when he announced that he would not be recommending further loans to six State-owned enterprises (SOEs).

Canter operates in the seemingly boring space of fixed-income and structured loans in which his firm, owned by Old Mutual, lends large amounts of money to the government, provinces, municipalities and SOEs and earns a healthy return on these loans. It’s a very large company (assets R160 billion under management) and plays a very important part in the funding requirements of many local operations.

Bravo to a brave man I thought when I read the announcement, but I was also not surprised to read that parent Old Mutual rushed to put out a statement the very next day that it does not share Futuregrowth’s opinions on the SOEs. Expect some very serious discussions to take place over this issue in the next weeks and months.

I was also not surprised that the lead story in the Business Times yesterday was a hatchet job on Canter, with issues such as poor performance, high fees and transformation (or the lack thereof) at Futuregrowth raised by some SOEs quoted in the article. This is called ‘spin’ and the government is very good at it.

This is how it happens in this country and I’m not sure how career-limiting such a move by Canter was.

Canter was simply doing his job by asking some simple questions: how safe is the money on loan to these SOEs and how sure  am I that investors will get repaid? It’s called fiduciary responsibility. He asked the same questions about Abil some years back and avoided that financial bloodbath for his investors. Now he has moved up into the big league.

The next four to five months are going to be crucial for this country. A downgrade of our bonds and currency to sub-investment grade will, no doubt, be the final straw for a very fragile economy, plunging business and consumer confidence further into negative territory and will probably keep the country in a recession for several years to come.

With unemployment at almost 30% of the population; almost 50% for people under the age of 30, you are looking at a scenario once described as ‘too ghastly to contemplate’.

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

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the only matter I disagree with is “next four to five months going to be crucial”. its going to be next decade or even further. foundations being set for a very tough time ahead as we have witnessed in say Venezuela where after decades of socialism the masses are only now coming out on the streets

Little “mini me” Magnus strikes again…

well magnus and moi have the runs on the board!!!

It is for similar, if not very closely related reasons that some of the International banks have withdrawn their lending support to the SOEs and also why some of the local banks have cut their ties with certain customers, and in doing so have rattled the cages of those who have been hiding behind supposed good governance and perceived power the ruling party claims to have over all and sundry.

Those who have invested in these affected banks have the right to know that their money is protected and not hinge to be misused or squandered. Government guarantees no longer are your warranty that your money is safe as has been proved several times with SAA and other SOE’s.

We need a complete change at the helm of the ruling party before any new trust can take place. And no matter how they protest or make statements, those with the purse strings now have the power and not the sticky fingered comrades with their hands stuck in the cookie jar.And the status quo will remain until we have new reliable and honest blood at the top of the pile.

Are we looking at an “Arab Spring” ?
Time will tell – but the truth is that neither Tunisia nor Egypt are better off. We are all the losers here!

True, but they got rid of the cartels who were robbing the people in their countries blindly and they eradicated themselves of some of the worst dictators in modern times.

Egypt went full-circle from one dictator, to one “elected”, to a military dictator.

We have a government that is seen as one of the worst in the world, while our financial system and regulations are regarded as the best. This situation reminds me of a statement made by Warren Buffet: “Invest in a company that can be managed by a monkey, for some day it will be managed by a monkey.”
South Africa can only afford to be “managed by monkeys” because of our strong financial system.

So glad i took Magnus’s advice 3 years ago and moved offshore. Even when the rand strengthens I know I have a wider exposure and selection via NySE. And then SA leaders…i have said it before and say it again… A bunch of uneducated and thieving bafoons will never create a thriving economy. Not possible. Even when resource prices were high and SA was doing well…we still vastly underperformed other resource economies.

A VERY BLEAK VIEW (that I hope never comes true)

Holding investments that are “off shore” or based on strong currencies are fine – we all have them and the government is aware of this.

I have wondered many times about these investments should all systems in SA fail and the ruling party decides to attach such investments – directly or via the investment houses that acted on our behalf.

Would you agree that although these investments offer great returns based on the weak local currency and local business performances they carry a great risk in an ALL FAIL scenario where proprietary rights are all rescinded and reversed.

Remember: senior government officials dislike these type of investments intensely (unless of course if it is for the individuals personal account)

I don’t trust this any more than I trust the government

I share your concern about the expropriation of assets by government. It is easy for some commentators to state that property rights are enshrined in the constitution, but the facts clearly state to opposite.

It should be of great concern to all owners of property (assets in all forms) that the court, that is supposed to uphold the constitution and protect the right to property, actually sided with government in the expropriation of mineral rights. They simply named the act of theft “custodianship”, not expropriation. If I steel something for the benefit of my children, will the same judge also see that act as custodianship?

Security of tenure laws, mining rights, mineral rights, minimum wage and labour laws, water rights etc. are all examples of how government infringed on the rights of property owners. In all these cases private property is nationalized on an ongoing basis. The high rate of inflation and the weakening currency is by far the biggest form of expropriation of private property but very little is said about that.

It is clear that although we have a sound constitution, our judicial system is too weak to uphold it, and property rights in South Africa is not safe. It is because of this court sanctioned infringement on property rights, one of the most basis rights, that people are killing one another for the power to make laws to expropriate property.

“As long as it is admitted that the law may be diverted from its true purpose–that it may violate property instead of protecting it–then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.”
― Frédéric Bastiat, The Law

African governments have a tendency to self- destruct. one wonders if it is misplaced ideology (socialism/communism) as learnt in the USSR /China/North Korea , fear that they might be removed from their positions of privilege or just plain GREED – me thinks it is the last option.

Magnus – Why are you still in SA? – Go join Robert in Sydney

Of course all the developed economies are flying – With close to negative interest rates because they cant repay their own debt!

unlike me – MH – stayed to help people like you. that is a massive call and even bigger sacrifice he has made for people like you

Yep, he is such a “giver” – Of course he is not earning commissions on all his clients investments – It makes sense to have money offshore.. Just buy low cost tracking funds (no fees eating up investment returns) – Al least you have admitted to running away Robert…

We are so fortunate to have people like you giving advice. Like they say Africa is not for sissies Robert better that you stay in sydney you will not make it in Africa!

“Africa not for sissies” – hmm seem to remember how the chicken run in Rhodesia became the owl run!!!

To my mind these articles often miss a single but important component, its not just fund managers that have invested in SoE’s but also the PIC which has invested hundreds (if not more) of Government employees pension funds into SoE’s – surely if we end up with a downgrade the PIC is going to take a hammering on its investments to the detriment of government officials pension awards into the future. This could be an interesting scenario as it plays out and the explanations could be epic

you are 100% correct. I have said before the big losers in all this will be taxpayers and pensioners. the former because the taxpayers will be picking up the tab for the lost millions on saa etc etc, pensioners because when they go to draw their retirement money – IT AIN’T GOING TO BE THERE

The money will be there for the pensioners. When a pension fund runs into problems, the funder of last resort is the sponsoring employer, in this case Govt, ie the taxpayer. This is the reason that most non-Govt organisations switched from pension to provident funds. They didn’t want the unfunded liabilities of uncertain amounts.

It’s time for Govt/quasi-Govt employees to be switched to provident funds like most of the non-Govt employees. Allow existing employees to maintain their pension options up to the date of the switch if they so wish and from that point on contributions go into a provident fund. Perhaps those aged 50 or 55 plus would have to have the option of continuing the pension option until retirement since they would have been planning for that. At least, that way, although it is a relatively long term option, they would start to control the problem.

Wendy, an important caveat to your reasoning is unless the Govt, being sponsoring employer, doesn’t care if an actuarial deficit arises under its mainly defined benefit pension funds. Already, there have been some highly questionable and definitely crooked investments in “struggle buddy” self enrichment schemes, like the massive loan to the trainee journalist Iqbal surve, to buy Independent Newspapers. Another caveat is that the Govt employees won’t change to defined contribution provident funds, because their defined benefit pension funds are so generous. The real sponsor being the tax payer, who is being sucked dry in leech-like fashion. These large defined benefit pension funds are yet another drain on the overstretched system of self aggrandizement, in addition to the high average remuneration paid to very unproductive people. The basic sustained financial discipline found in well run countries is uncaringly absent here.

Get your money offshore, put it into a trust and break the link with SA by paying the donations tax upfront. Local “offshore funds” don’t fall into that category and these funds can be forcefully brought back to SA via a directive from Treasury.

A quick and easy way is to lower the direct and indirect staff expenses of the ANC parasites masquerading as a government, tens of billions will be available almost overnight. But then parasites are self-seeking and don’t care about the host, so that wont happen in a hurry….

it is always darkest before the light!!! everything will be alright!!!

As stated the global commodity cycle has collapsed since late 2011. Why then have the resource unit trusts and indeed the resource heavy Investec Value fund been the best performers over the past year?

Do yourself a favour and look at the performance of commodity funds over 3 and 5 years. And then ask the same question.

why not from 31 January 2016?

Over 3 to 5 years, the resources sector has performed dismally but over 1 year their performance indicates that this sector is entering bull territory after 5 years of selling.

Dr Thai and Virgin, they have been good performers in rands because of the exchange rate and the rand declining against hard currencies, but poor performers in US Dollars….

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