Fiscal consolidation is the only way out

How the world has changed in just eight months. This year kicked off in an exuberant mood with equity markets fuelled by synchronised strong global growth forecasts for 2018 and the announcement of tax cuts in the US.

The rand staged a valiant recovery to R11.50 S, and the FTSE JSE all share index rose above the 60,000 level on optimism about SA’s prospects following the election of Cyril Ramaphosa as ANC president After he became president of the country, Ramaphosa’s rapid action against corruption particularly at Eskom combined with a powerful presence on the Davos stage, made us proud. He undertook to tackle the impasse in the mining sector created by the Mining Charter and ruled out the nuclear programme.

The Reserve Bank revised its growth forecast for 2018 to 1.4%. The only blot was the sell off in bonds sparked by the prospects of higher than expected US interest rate increases. A bare eight months later SA is in a recession, unemployment is at record highs, the rand is trading at 1115.20 $, political rhetoric has scared off foreign investors and the Mining Charter is nowhere. There are also real prospects of a credit ratings cut by Moody, which will push government debt into junk territory, which is likely to lead to about R180bn flowing out of bond markets, triggering higher inflation, an even weaker rand and interest rate increases. Most worrying is the news that the SA Revenue Service has inflated its revenue collection figures and that tax compliance levels have dropped dramatically. This raises questions about how much revenue the National Treasury has at its disposal. But domestic factors are only partly responsible. Much of the blame can be attributed to the US trade wars and unstable politics, the perversely strong US economy, chaos in emerging markets such as Turkey, Argentina and Venezuela, and de-risking by global investors.

There is not much that SA can do about it. The sell off of emerging markets is unlikely to reverse in the short to medium term. Given where SA is, fiscal consolidation whether self imposed or IMF bail out enforced is coming. There is no money to stimulate the economy or bail out state owned enterprises. Fiscal consolidation means that the sale of state assets is on the table, as are job cuts, low and volatile investment returns, lower wage increases and generally negative sentiment. In the past year, there has also been tremendous value destruction by Steinhoff, Resilient, Fortress and now MTN all top 40 shares listed on the JSE.

There is no way of sugar coating what is happening. But there is no choice except to get through it What is needed is a credible medium term budget policy statement and clarity on economic stimulus measures. What is actually needed is a plan. The government should stop overspending and promote tourism because SA is a cheap but amazing destination. South Africans need to pay their taxes and budget Some criminal prosecutions need to kick off to boost domestic sentiment. I am often asked how people can protect their savings in times like these. There is no simple answer other than being conservative.

Overweight money market and offshore investments with a focus on the US and underweight domestic bond and equity exposure and watch what you pay in management fees. Offshore investments are easy to access through international unit trusts or exchange traded funds. It is also not a bad time to buy property as foreign investors flee and emigration picks up. Most importantly, budget wisely. The effects of what has happened to the rand are yet to work their way into prices. Once they do, the real impact will hit home.

Source: Business Day