Alec Hogg unpacks Budget 2020 – the full webinar

We appear to have created a new tradition. A few hours after finance minister Tito Mboweni’s presentation of the 2020 Budget to Parliament, Biznews community members joined in our webinar with publisher Alec Hogg. After his presentation to share what he’d picked up from a morning in “lock up”, the fun really started with Hogg fielding questions on a wide range of topics relating to the Budget. One which had Mboweni between a rock and a hard place. And a big thanks to our sponsors BrightRock.

Well, hello this webinar is brought to you by BrightRock. We’ve got a lot of people who are attending the post-Budget webinar tonight. Thanks for being with us. I’m Alec Hogg and my colleague Stuart Lowman will be making sure that everything technical happens the way it should. Stu?

Yes, thanks, Alec. I’m glad you survived the early wake-up today. We know lockups are a nice and early surprise for some. Many are still sleeping. Just quickly, before we get going as Alec mentioned; if you can hear my voice and see Alec’s front page of the presentation… There’s a little Hi-5 button you can click. If you can click on that, I’ll see. Yes, there we go. All the Hi-5’s coming up. That’s good. And then, for those new to our webinars, we do like to keep them conversational. There’s a little questions/drop box on the control panel on the right-hand side. If you put your questions in there, I’ll pass them onto Alec as he runs through what he’s learned from today’s Budget. Alec, over to you.

Brilliant, and I’m sure that we are going to have lots and lots of questions. Stu, you just interject whenever they come through. Well, you can see that I’ve headlined this as a Hail Mary exercise as South Africa is drowning in a lake of debt. There’s really no other way to describe it, just to let you know that we’re very pleased to have been able to make this webinar available to all members of the Biznews community, thanks to the sponsorship of BrightRock. We love our business partners and we hope you do too. Okay, so that’s the graph that encapsulates everything for me. Those of you who’ve been to various of the seminars and presentations that I’ve done around the country – incidentally, I’m doing one again next week. It’s free for Biznews Premium members. It’s about £10.00 or R200.00 at the moment, anyway for everybody else in the Biznews community.

You can go onto Biznews and sign up. Johannesburg is Tuesday night. Durban is Wednesday night and Cape Town is Thursday night. Come along. Have a glass of wine. Have a chat and I’ll be doing an expansion of this webinar in that roadshow by actually having a look at our Global Portfolio, – which is now no longer a Global Portfolio – as we are making a few adjustments. That portfolio by the way, continues to go gangbusters. It’s incredible, but we’ll be talking about that then.

I’m going to make quite a few changes to it so if you are able to come along, please do. I have mentioned… I have put this graph up a few times and you can see there when Zuma was appointed in 2009, South Africa’s debt-to-GDP ratio was 26%. This is a very important number.

What it means is if you imagine that a person is earning R1m or they’ve got assets of R1m and they’ve got debt of R260,000; well the banks will be quite happy to lend to them but if they’ve got assets of R1m and they’ve got debts, which are much higher than that i.e. R600/R700/R800,000, then the banks wouldn’t be that keen to lend to them and that’s exactly the same way as it happens in the international community. Essentially, for developing countries, debt-to-GDP ratios shouldn’t be above 50% and in fact, when South Africa’s hit 40% in 2012; immediately, there was a change from Treasury where they said we must now get things under control and start pulling back on spending, and try and get a little bit more income in – in other words, higher taxes – as a consequence of which, we’d be able keep South Africa’s debt-to-GDP ratio around 40%.

Well, as you can see, Treasury might have thought that was a good idea. Jacob Zuma and his cronies certainly didn’t and the robbing blind of South Africa over the past 9 years has had a deleterious effect that you can see in this very important chart which shows you that debt-to-GDP in the country is sitting at over 65% and it is projected to go over 70% in 2023. When you look at this, you actually come to the conclusion that given the projections that Tito Mboweni and the Treasury guys are making for the next few years and in this Budget itself; they’ve actually given up. They’ve given up on the ability to continue to have an investment grade rating in South Africa. Sorry. They haven’t given up on the country but they’ve given up on the investment grade. There was so much effort made to try and retain the investment grade. 

Remember, we’ve got three major ratings agencies in the world. S&P, Fitch, and Moody’s and both S&P and Fitch dropped South Africa’s investment grade some time ago – 2017. Moody’s has kept it above investment grade and this has given the country the ability to borrow money on international markets at a lower rate than it would otherwise do. The reason for that is when you are investment grade, the bond funds around the world are allowed to invest in your bonds. In other words, they’re allowed to hold South African government debt and that’s been one of the major motivators for the country to actually keep its financial situation under control – to keep the debt under control, and to make sure that it doesn’t rise too high but as you can see now, the debt is at over 60%.

In fact, as we stand here today, it’s gone up to over 65% in the coming Budget – 2021 – and it was projected to go to 71%. So, put it all together. They’re losing the battle against too much spending and not enough income. This time around, the government is not the way it was under Zuma’s administration where they really didn’t care that much about these ratios. This time around, the government cares a lot about the ratios but it’s actually caught in a situation that is pretty much none of its making and it has to now start bailing out SOEs and doing things that are going to make it impossible to keep the debt under control, at least in the short term. Hence, the Hail Mary Budget that happened today. We’ll get to that in a moment but South Africa’s national debt has never been this high.

I pushed back the numbers. I’ve got the numbers going back to 1982 and you can see going up to democracy in 1994, there was a big increase in the debt-to-GDP ratio. Then first under Mandela and then Thabo Mbeki, it improved dramatically all the way down to 26% and since Zuma came in, it’s been going in the wrong direction. One of the reasons why this government has got a problem in fixing the debt mountain that has been built and is continuing to build is because the economy is just falling over the cliff. It’s not too bad, I suppose. It hasn’t gone the Zimbabwe route but, in a country where you’ve got the population growing at about 1.5%, you simply cannot afford to have this kind of a picture. And I’ve put this graph up here, taken from the Treasury to show you that our economic growth rate has now gone down to 0.3% for 2019.

They were Budgeting last year, just a year ago… They were expecting the economic growth rate to be 1.5%. Now, if you put all of your figures together on an economy that’s growing at 1.5% and it actually ends up coming at 0.3%, it’s like saying ‘well, you have sales projection coming out at… call it 15% and you structure your business around that kind of sales projection and your sales only grow by 3%’, you know that your margin means you’re probably going to go out of business. Well, thankfully, countries don’t go out of business but what they do when they get this kind of performance when their revenue undershoots and their spending isn’t cut – and that’s what happened in South Africa in the past year – is they have to start borrowing and borrowing, unfortunately, has a really bad consequence.

Just to look at this quickly: 2019, we’re really hurt by agriculture. Not surprisingly, expropriation of land without compensation has made the farmers terribly nervous, so it’s unlikely that you’re going to see a substantial contribution from agriculture until that whole story has been sorted out. Mining had a bad year as well but that was through policy uncertainty, which appears now to have been addressed and construction you can see, was the other bad sector in 2019 and that’s pretty cyclical. When the economy’s not growing, then you don’t have people investing in new buildings or new roads or anything new really and as a consequence of that, construction comes under pressure. Of course, the people in the financial sector are doing okay. That sector of the economy grew by the most of any sector in 2019 but not exactly gangbusters at 2.6%.

There you can see central government had a particularly good year, if you happened to be working in the public sector and we’ll talk about that in a moment as well. So let’s move on to what this means. This is a reflection of what’s going to happen in the projection so let’s just start off there. That first column of 2019/2020: that’s as of now – the government’s fiscal year as at the end of February, so they’ve got a pretty idea how much money’s going to come in. They’re looking there at R1.5trn coming in as taxes, which is undershooting by R63bn. They were expecting last year, to get R63bn more than is actually coming into the pot. Expenditure though, is going to be about R17bn higher than was expected in last year’s Budget so spending has gone up higher than anticipated.

Your income has not grown or is significantly less than you anticipated and there you have a Budget balance, which was being projected at 4.5% of GDP. Now, these are important numbers because that’s what the international community looks at. The first thing they ask is, “What’s your Budget deficit?” And if your Budget deficit is 4.5%, it’s possible. If your Budget deficit is over 6% as this one is – 6.3% – then they say, “Should I really be investing in that country and is the currency going to be able to hold it?” You’re spending a hell of a lot more than you can afford and as a result, you’re borrowing and at some point, in time, you’re going to have to repay those borrowings. I’m not so excited. What you can see there is for this fiscal year, that Budget deficit is going to 6.8%. 

Now, if Mboweni and the Treasury wanted to retain the investment grade rating… if that was the #1 priority in their minds, they would not have allowed the Budget deficit to go to 6.8%. You would have seen something like maybe 2.2 or maybe even 3 percentage points in VAT. The problem with that though, is that South Africa just cannot absorb anymore taxes and that’s the reason why you didn’t see anymore tax increases. When you look into the details as I did today on the Treasury document, you will see that the tax take is down substantially on what was anticipated last year – by R63bn (well, we know that) – but the areas where it was down in, are the areas you wouldn’t expect, which is income tax and VAT. So, you jack up the income tax. What does it do?

It makes people want to cheat more. You jack up VAT and they want to cheat even more because they can on VAT and it turns you into a nation of cheaters. Essentially, the Treasury has said ‘we’ve already pushed taxes to as far as we can. If we were to push it even further, it would have a negative effect. There’s a thing called a Laffer Curve, which the economists will tell you… There’s a certain point at which, when you push taxes above that, you actually lose money so it appears as though you’ve got a higher tax rate but you get less money in and that is where South Africa seems to be right now. So, a 6.8% Budget deficit is almost like waving goodbye to any thoughts that there was of having an investment grade rating.

That’s going to have an impact on the Rand and a consequence of that is that we’re probably going to see higher interest rates but the good news in all of this is that we’re in a global low interest rate environment so if you’re ever going to get yourself into the kind of mess that South Africa’s in, this is the best time you could have asked for it. Moving onto the next thing – and I wanted to show you this because only four months ago, at the medium-term Budget projection or what we used to call the mini-Budget – it showed that we were going to have a… there you can see the number.

Let’s start at the mini-Budget – this was at the end of October – Treasury said to us that they were going to bring in R52bn less than they thought for this fiscal year. R52bn: that’s a lot and remember, there’s all the money that has to be spent on Eskom etc. so even though they’ve been trying to cut government spending, they’ve got this Eskom millstone and SAA millstone around their neck so they aren’t making much of an impact there. The problem with this is if you look further… So there, you’ve got R52bn this year but then it projects to the next year, so they’re down R84bn in this financial year and R114bn in the next year. So, it’s like having a sales base. If your sales base in the company reverses in one year, you’re coming off a much lower base and it’s exactly the same with tax. 

But now, 4 months later, it’s actually R10bn worse than it was at the end of October. At the end of October, we were sitting at R52bn less this year in revenue that’s being brought in. Now, we’re sitting at R52bn plus R10.7bn, so R63bn less that is coming in this year. And, if you go out into future years it looks even worse, so we’re in a hole. We’re in a deep hole and that gives you an indication of where you are.

South Africa’s Budget deficit for this year – remember, they go from 2020 to 2021 – so February this year we’ll be at 6.8%. That is the second-highest on record (and I’ve taken this all the way back to 1970). The highest up until this point was in 1993 and that was a time ahead of democracy where the spending really went mad. If you recall – those of you who were around at the time – it was a very difficult period.

High security issues. There was even a concern that we wouldn’t have an election at all and there was an enormous amount of spending that was done by the National Party government to perhaps use the last bit of power that it had and we went to a record deficit there of 7.1%. As you can see, generally speaking, South Africa’s Budget deficit has been around 4% and there’ve even been a couple of years 2007/2008 when we ran a surplus under Trevor Manuel but that gives you a picture/an understanding of the parlour state of South Africa’s finances and indeed, the finances are going to get even worse in the future. They’ve put a brave face on it. They reckon that the Budget deficit will come down slightly in 2022 and 2023 but that is presuming that there are going to be some serious cuts to the public sector wage bill, which they’ve tried since 1994 and South Africa’s just never managed to get the public sector wage bill down.

In the press conference today, Tito Mboweni bemoaned the fact that it’s really, really hard to cut spending in government. He’s trying to show in a ‘lead by example’ by i.e. flying in economy class, showing people that things are really tough and we’ve got to cut back. He says, but in the government it’s not that easy and I guess he was speaking with his private sector hat on in that respect.

That’s another graph that shows you the parlour state interest payments. It’s just exponential growth. It’s happening there. We’re getting up to nearly R300bn per year in interest payments. Very scary numbers. It’s around 15% now of the total revenue that’s pulled in by the country, which is servicing the interest and there’s another number.

I suppose a good thing here is the percentage payments of GDP were higher during the last days of apartheid and the early days of democracy but the direction that you see there is of deep concern and that gives you a reason for it. As the interest bill rises then your Budget deficit rises as well. I hope you’re following all of this. Really, what I’m showing you here is that as the interest bill goes higher and higher, that takes a bigger chunk so we’re looking now at as you can see, 6.8% in this year.

So, in this year, we’re going to have a Budget deficit of 6.8 % and that’s projected on the figures that Treasury is hoping for. Yet. Two-thirds of that just goes on servicing the interest and it’s this debt spiral that economists talk about.

As your debt rises, your interest payment rises and you get into a situation like South Africa’s got into here where you start off on a base where you’re in trouble before you even think about anything else. You’ve got to pay your debtors and the people who own the borrowings that you have. There are only two ways to get out of this. The one is to reflate and that means inflation will actually make the debt that you have look relatively small. A lot of these debts are fixed rates of interest so if you’re running an inflation rate of 16/17/18%, then what a pleasure to be paying 5 or 6% interest but of course, that costs you in the long-term. The other way of getting out of it is getting a lot of money in and the way that South Africa gets a lot of money in is when resources boom.

In 2007/2008, resources were really screeching ahead so you had huge money coming into the country, which enabled the country to run a Budget surplus even after paying all the interest costs but that’s the situation that the country is in so it’s quite a challenging position to be in. Looking at all of that, you’re looking at all the debt service costs – as I said it’s going up to 2023 – nearly R300bn – rising at 4% at the bottom. We’re at R205bn this year. That 4% means a percentage of gross domestic product and as you see, that’s growing. The interest service costs in South Africa are growing by about 12% on average over the next 3 years, which is much higher than revenue is expected to grow (around 4%). Why? Well, I don’t have to tell you about Eskom but this puts it into perspective.

They gave us figures today going back over the last 12 years of what Eskom had received from taxpayers and then what is going to happen in this year, in the next 3 years, and the R23bn per year thereafter and the number comes out at R400bn that the taxpayers have injected into Eskom directly and that’s before the costs of actually fixing Medupi and Kusile, which had design faults, which are a consequence it appears of corrupt or incompetent people being in Eskom doing the decisions on how to build those power stations. We know that Hitachi, the Japanese company that got one of the major contracts has been fined in the US for the corrupt practices it had over those two power stations but the reality is that South Africa is sitting with a big, big problem when it comes to energy and the penny fortunately, appears to have finally dropped.

There was more discussion today about freeing the electricity sector. Remember, we have had this monopoly. If you wanted to produce electricity, you couldn’t sell it back into the grid because Eskom wouldn’t pay you for it. Well, they wouldn’t allow you to do it. Then, in the SONA, municipalities in good standing (not all municipalities are in good standing, as we well know). Many of them owe Eskom billions and billions. There’s an overall debt of billions of Rands. But, municipalities in good standing like Cape Town municipality is now allowed to actually buy in electricity from the private sector. So, you’ve got this… the crisis has not been completely wasted but as taxpayers, we’re going to look at this and say, “Oh, my goodness. The money that’s going into Eskom is still going to be escalating this year – about R55bn.

Then there’s still another in the next tax year – over R30bn – and then we get back to the R23bn per year from 2023 so the R400bn the taxpayers have put into Eskom is the number that its cost us, let alone the impact that loadshedding has had on the economy and we know that now from the financial situation of the country where the country got in R63bn less in tax than it was expecting, primarily because the economy collapsed from the expected growth rate of 1.5% to 0.3% that was primarily because of loadshedding. Loadshedding is massively disruptive and anyone who lives in Johannesburg or Cape Town (I presume) – I haven’t had the misfortune of driving in Cape Town during loadshedding but I guess anywhere in the country, you’re frustrated.

But, in those two cities, the traffic is bad anyway. When you have loadshedding and no traffic lights, we just know the impact that has on the stress levels on people apart from the waste of time that is spent in gridlocked traffic. Anyway, there are the stories. The biggest one is Eskom. South African Airways: if you go back (we were told today) in the Treasury documents 12 years, South African Airways has cost the South African taxpayers R32bn. So, when Tito Mboweni (and he actually flies British Airways) says that he’s not going to support them and he’s going to put them out of business, you can understand why. R32bn just to keep it going and it’s still losing money every year with the latest money that was put in there. And then, the others are very small next to that.

SABC, significant given the impact it has on the country but mainly Eskom and the SAA.

So, where is the tax coming from? Who’s going to pay for all of this. Where’s the money going to be injected from? You can see here that 38% of the tax that is paid into the fiscus of that R1.5trn comes in personal income tax. I’m going to give you a little bit more detail about that in a moment. About a quarter comes from VAT, 16% from corporate income tax and 8% from Customs and Excise and the fuel levy is only 6%. Interestingly enough, there’s been no increase in personal income tax this year, which is a reflection that they can’t push the envelope any further. Income tax in South Africa has got to a level where you push it up and get less money in, so you can increase the rates.

You’ll get less in. What Tito has done… the one area where he has provided relief is in fiscal drag. Now, fiscal drag is when you’re working for a company, you usually get a cost of living increase so in South Africa, it would be about 4% just to offset inflation. That tends to push you up. We have a progressive tax system so the more you earn, the more at-the-margin tax you pay. For years now, fiscal drag as it’s called – this bumping up of people into higher tax categories because of inflation – has not been addressed. This year, fiscal drag was addressed for the first time in a long, long time and effectively, what Mboweni did was give back something like R14bn to offset fiscal drag of R12bn. I hope that makes sense.

Because of inflation, if you did nothing else, there would be R12bn in income tax that would be paid this year but to offset that and a little more – R2bn more. It’s a slight improvement. You’re certainly not going to buy too many cups of coffee with the benefits that you get but to offset that, there has been a slight adjustment in the tax rates so that we’re not going to be penalised for inflation. That R2bn has been paid for in two ways: through carbon taxes (R1.75bn). You’ve got to ask yourself, “Who’s going to pay carbon taxes?” Well, there are only two companies really in South Africa who are major carbon emissions and Eskom of course, is one of them. Sasol is the other and it’s quite a chunk – R1.75bn and the other R250m is for plastic bags, the price of which goes up to 25 cents as a result.

Tito’s got a thing about plastic bags and I think he’s not the only one. If you follow his Twitter stream, you’ll see that he loves Rwanda, where you don’t see too many plastic bags because people go around and pick things up. He loves cleanliness and he’s hoping we can do the same here. Maybe by increasing the price of plastic bags, it would be like the increase in cigarettes, which went up again this year. They get to a point where people not only cut down on smoking but stop smoking.

So, here they are: the story that I’ve just outlined for you. You can see that in total, this is the only impact that one is seeing on the revenue, on the taxes – the new tax proposals – in this year. There’s a small increase, inflation-adjusted increase in the fuel levy which again, is unusual because the fuel levy has been going up by significantly more than inflation.

It’s going to go up 25 cents per litre, 9 cents of that goes into the RAF, which is in a complete disaster. There’s something like a R600bn hole in the RAF. Who knows how they’re going to fix it? Tito suggested today that they might make 3rd party insurance compulsory in South Africa. That’s the proposal for it but that’s for another day. As you can see here, gross tax revenue, pre-proposals R1.425bn, post-proposals R1.425bn, so very little impact there. Who pays this though? The individual taxpayers, remember, who kick in 38%. I did the numbers. The taxpayers who earn more than R1m, so you can see those are the bottom two areas – registered individuals. They pay 40% of income tax. So that 38% of the total tax that goes into the country… you’re talking about 16%/17%-odd.

So, a little more than one-eighth is paid by just 300,000 people so it gives you a reflection that South Africa cannot afford to lose its skilled people. The skilled people are its tax base and they are the envy of every other African country and as a consequence of that, the emigration flow is another issue that is really hurting this country in a big way. If you have a look at the other end of the scale, you will see that the registered individuals who don’t pay tax…in other words, people who earn less than R80,000 per year – and they shouldn’t be paying tax – that threshold goes up slightly to R83,000. That’s about equivalent to the number of people who actually pay tax. You could call it 13-million South Africans who are in the tax net – half of them don’t pay tax.

The other half do but if you see the biggest chunk of them, it’s those who earn between R6,000 and R12,000 per month. They only pay 4% of the total tax take and they’re almost one-third of the people as a whole. So, there’s a very heavy weighting towards the high-income individuals and still, they’re looking for more from the wealthy. There was a statement… a line in the documentation today to say that SARS is establishing a special unit just to investigate the wealthy individuals and that unit will be looking at ‘complicated’ tax affairs. So, if you’re wealthy and you have complicated tax affairs, just get it in order because SARS has got a special unit. They’ve got a confident man back in charge in Edward Kieswetter.

The problem is that tax morality is at the moment, at a level the same that we saw during the worst of the Zuma administration where what was being brought in (they call it the tax buoyancy ratio). When the tax buoyancy ratio is under 1, it means that you really don’t want to increase taxes because you’re going to be receiving less into the future and during the time that the tax service was hollowed out, the tax buoyancy went below 1. It was far higher during the Pravin Gordhan years but it’s expected to stay below 1 this year so another part of the reason for not increasing tax this year is that the state doesn’t have the capacity to actually collect the taxes.

So, if people are going to cheat because taxes are higher and the state doesn’t have the capacity to collect it because SARS isn’t actually geared up to do that because of all the abuse that has happened there over the past 5 or 6 years at least, it just doesn’t make sense to increase taxes this year. Who knows? Next year, they might feel more confident but at the moment, it doesn’t make any sense. There’re the personal income tax tables. If you’d like to make a screenshot of this, you’ll be able to work out your own income tax – what you’ll be paying in the year ahead. Not a bad idea for those of you who are trying to sort out your tax positions so you can take advantage of the 12-J allowances.

Incidentally, I read J for I. I couldn’t understand why, in the fine print of the documents today, it said that the 12-J allowance for industrial policy would be terminated at the end of March 2020. It’s actually the 12-I allowance. It’s got nothing to do with what Kevin Shames at Bright Light are doing – nothing at all. That continues for another year and let’s hope that incentive goes much further than that because it’s been one of the most successful incentives that government has brought in and you just wonder how much worse the employment situation would have been without all of these 12-J companies who are investing in small businesses. But anyway, I made a blaps there, Maybe, it was that 4 o’clock morning that Stuart was talking about as I saw a J for an I but anyway, we got that cleared up.

But as you can see here, this is the personal income tax rate. Take a screenshot and it will be on Biznews soon anyway, so you’ll be able to work out your own rate. So, who’s benefitting from all of this? Big beneficiaries are state employees. As you can see there, the state employees continue to take a big chunk of total spending of over one-third. Okay, it’s down a little from where we were in 2012, but it still is 35%/36% and this is the area where Tito Mboweni has really been trying to make an impact because if you can bring down the employee share of your expenditure (almost like a company that’s overstaffed)… It might cost you heavily in the first year to give people retrenchment packages and so on, but then at least you’ll have lower running costs going into the future.

In the last two years, Mboweni has tried bringing in early retirement. You might recall there was a lot of excitement two years ago when he initiated this package for public servants. They made it attractive enough, they believed, for people to go off at 55 rather than 62 or something like that in their ages. They were expecting 30,000 to take the packages. The consequence of that has been an abject failure. A total of 4,000 have actually taken the packages.

You can see there’s no impact whatsoever in the consolidated expenditure. In the past year, the taxes to fund public sector employees continued to rise. It’s really a very difficult situation for the government because it has to go head-to-head with the trade unions. Now, at some point in time, they’re gonna bash heads because it cannot continue along these spaces.

The public sector employees have had their salaries increased in real terms, by more than 40% over the last 12 years and that is paid for by taxpayers. So, the taxpayers are paying too much. You can’t take more from the taxpayers. Now you have to borrow from future generations to pay for current expenditure and for the employees of today because the trade unions are so strong. Big problem, isn’t it?

Here we go.

There’s a table that I pulled out from the mini-Budget presentation and it shows you exactly what’s been going on. There are now over 29,000 public servants who earn more than R1m per year – 29,000 earn more than R1m per year and that’s what’s been happening on the growth of public sector. You can see the silver line.

If you worked for the state, you’d be doing a whole lot better than if you worked in the private sector and as a consequence of that, our debt rating is almost certainly going to go into junk now when Moody’s makes its decision next month. There could be a miracle. Let’s hope for it but I think we need to prepare for this. As you can see, S&P and Fitch, in November 2017 already, had dropped us down to 2 levels to junk. Moody’s, at the same time, moved us to right on investment grade and from next month, the investment grade… we’re probably going to go into junk for everybody given the situation we now see coming out of the Budget. Who knows? It could be a miracle. We could see Platinum Group Metals surging up. Mboweni mentioned this today as one of the things that could help the economy in the next 18 months – a trigger that could kick in.

We do have changes in the mining legislation, which will promote more mining investment. We’re opening up the door of electricity to bring in the private sector including the fifth round of the independent power producing bidding. The first four were very successful. Then Zuma and Brian Molefe etc. for reasons only known to them, decided to put the whole thing on hold. Had they not done so; we might not have been in such a powerless situation with the supply of electricity as we are. But both in the SONA and today, there was pretty good news on that front that the private sector’s being brought in but probably too late and South Africa’s underperformance is reflected here. It’s something else that I pulled out from the mini-Budget.

As you can see, we’re the purple/maroon line there and these are against peers that aren’t exactly in the top 10 countries or most of them that you’d like to live in.

You can see Mauritius. Okay, most people would like to live on the beach in Mauritius but Mauritius GDP per capita, which was similar to South Africa’s in 2007 has just streaked ahead – more than double. Similarly, with Thailand, Botswana, etc. So that’s the story of the Budget 2020 from today. Stuart, do we have any questions?

Thanks Alec,  that was very comprehensive. A few questions. PJ Eksteen wants to know in your opinion, is there not a parallel to Zimbabwe going back 20 years?

No, because we have a government here that’s trying to do the right thing. Since 2012, the Treasury has been trying to cut back on government spending. In Zimbabwe, that was not the case. Then we had a president a little bit like PW Botha in fact, and I remember very well being at an International Monetary Fund Conference where Barend du Plessis was the Finance Minister and PW Botha back home had just announced a massive increase for public servants and then the day afterwards, he announced that there would be an election and Barend du Plessis had no clue what was happening there. I guess Mugabe was the same kind of a leader as PW Botha – a total autocrat.

You don’t have that situation in South Africa. Here, you have a leader who understands economics, who is aligned with the Finance Minister, and who is aligned with the Treasury, so it’s a very different situation to what happened in Zimbabwe. Is it a difficult challenge that is faced? Of course it is. It’s a country that is trying to fix the mess that was created over the last 9 years and worse, the mess that continues, or the friction that continues to be created by those who made the mess shouting their mouths off to anyone who will listen. There’s a case to be said, to ‘just lock them all up or kick them out of the party or do something with them’ so that they can expose themselves. Maybe just educate people about what’s happened to our country through these people with their malfeasance. But we’re a democracy and everybody gets to have their say but no, very different to Zimbabwe.

Michael Summerton just wants to know if there was tan update on expat tax or are they back-pedalling.

That’s very interesting, Michael. I didn’t see it. It doesn’t mean it wasn’t there. You know what happened today: I went to Pretoria rather than Cape Town. Every year, I’ve been going to Cape Town and it’s pretty slick and really efficient. Pretoria is almost like a different country. In Cape Town, we were given lots of time. We walk in at 6 o’clock and you’re given all the documents and you can work through them all and I had plenty of time to do that. Here in Pretoria, I didn’t have… I had enough time to work through the stuff and I did a lot of preparation thankfully ahead of it but I saw nothing in there about expat tax and nothing in the Budget speech itself and I guess that with something as sensitive as that, if it was going to happen, it would have been more widely discussed.

Expat tax is there. There was a little thing that was mentioned but I guess we’re just going to have to dig around a little more to get…. Oh, I’ll tell you what it was. There’s an amount of R1.25m up to now or it’s going to be capped at R1.25m, which South African residents can earn from foreign income without having to pay tax on it. That was the one mention of international income but the whole expat tax story… You know, we’re an incredible country. We muddle along. We do stupid things and we have people making stupid statements. Then, kind of reassess and kind of fix it again and somehow manage to muddle through. On the expat tax where effectively, you’ve only got just over 300,000 people who are generating 40% of income tax… If you’re now going to cut 10% of this – 30,000 people because they’re ex-pats who still pay tax in South Africa, you’re going to hit your income tax very hard. It could be one of those but you can’t put your head on a block on this one. It is just the situation the country is in. It doesn’t need to take any more risks on losing more taxpayers.

Karen asks; is the Budget less bad than the market expected given the Rand movements this afternoon when Tito started talking?

No. I don’t think you could get a more bad Budget than this. What we know is that the country brought in R10bn less than it thought it would as recently as 4 months ago. What we do know is that the economy grew at 0.3% rather than 1.5%, which was expected 3 months ago and that’s really pathetic. It’s a pathetic level of growth. What we do know is that a lot of money is being spent on Eskom or being injected into Eskom. That’s #1 priority and the understanding exists that if you don’t have electricity, you don’t have a country so you don’t have a modern economy. So, you’ve got to get Eskom right or you’ve got to get electricity right (maybe in a broader sense). The international investors would not like this Budget at all and the reason they would not like this Budget is because they do not have time to come and walk around South Africa, see what great people we’ve got, the enthusiasm, the energy, the informal sector, etc. All they look at are the ratios and the ratios are horrible and they’re going to get worse. So, no, the reaction of the currency and the reaction of the international community is entirely predictable as is the downgrade that is almost certainly going to come in March.

Janet just wants to know if anything was mentioned on capital gains taxes.

No, Janet. Nothing. No more increase in capital gains tax. No more increase in property tax. Interesting: the take for property taxes had been far lower than had been anticipated. Remember, they jacked up the property taxes in recent years and it’s all part of this understanding that when you increase taxes in a population that doesn’t have the capacity to pay them, you actually get less because as you increase the taxes, people have a greater propensity to cheat. Add overlay onto that, SARS has been badly depleted over the past few years through State Capture because you cheat, they want you to pay more or you’re not going to get caught or you’re less likely to get caught because SARS is not so good anymore.

So, as a consequence of that, that penny has dropped with Treasury and Treasury is saying it will just be stupid to add anymore taxes at this point. It doesn’t mean it will never happen in future but at this point, the understanding is very clear, that higher tax rates are going to have a negative affect and it might in fact, be the case into the years ahead. South Africans have seen their taxes increase substantially since 2012 as part of the whole strategy towards trying to get lower Budget deficits and trying to balance the Budget. You can imagine politically, to increase taxes in the Zuma administration was not a problem because well, the cronies weren’t paying taxes anyway. They had their friends at SARS and the people who were being taxed were those that the administration didn’t like or the people who were paying the taxes.

Now, that has all changed and there’s a far more rational approach towards what higher tax rates mean and everybody’s paying tax or certainly, the people in this administration are doing so.

Just on the downgrade Alec, a few questions wanting to know what do you see the impact being on exchange and interest rates, or has much of the bad news been accounted for already?

I don’t know. I would imagine that the financial markets and those who play in it are far more intelligent than individuals like myself and as a consequence of that, they would have worked it in, almost certainly. It’s likely to… It must have an impact in the longer term. When South Africa comes out and wants to start borrowing money again, there’ll be less of an appetite but then on the other hand, we’re in a lower interest rate environment globally and if South Africa can offer a little bit of a yield sweetener, there are also some pretty dumb people in New York and London who are taking 30-yr bonds and 3, 4, or 5% returns, so the consequence of that is probably built into the market already. The big thing about all of this though is what happens to inflation if South Africa?

Like in Zimbabwe when they overspent… that was an extreme example where they spent money they didn’t have – substantially more money than they didn’t have over an extended period. They had hyper-inflation. South Africa is a long way from the hyper-inflation stakes but if South Africa were to push the envelope too far, you could see a concern moving in from international investors against the Rand. That would drop the value of the Rand and then, if there were no adjustments locally on imports and so on, we can see inflation starting to rocket and those would be the danger points that people like Mboweni and Lesetja Kganyago at the Reserve Bank would be watching carefully.

Laetitia just wants to know Alec, in your view she says, “What do you believe are the three most important things that Tito should have done to make the Budget more palatable for someone like Moody’s?”

No, there’s nothing he could have done. He was between a rock and a very hard place. Think of it this way. If he increases the tax rate, he’s going to get less. So, increase the tax rate. Push up VAT to 20%. We just automatically assume you take VAT from 15% to 20%. You’re going to get more from VAT receipts than you do at the moment. In fact, the recent experience says to us you’re going to get less, so we’re getting that Laffer Curve. Push up income tax rates. What will happen? We’ll be further out of kilter with the rest of the world. We’ll get less income tax. People will cheat more because SARS is not very strong at the moment and won’t be able to collect that income tax anyway. So, you’ve got two issues there.

You can’t increase taxes. As much as he might say it’s cause to celebrate that the taxes were not increased, he couldn’t. South Africa’s corporate tax is now out of line at 28% with corporate taxes elsewhere in the world and remember, it’s a competitive environment. So, if you have a company that is operating here and its tax rate is excessive relative to somewhere else that it can operate…well, it might just move. It might just relocate. What has happened on the corporate side is that there is an opportunity there to raise more taxes from the cheaters and the cheaters are the corporates that have been shifting money to lower tax domiciles and one of the favourite ways that they do it is they charge very high interest rates on inter-company loans to their South African subsidiaries.

Then, they channel the profits into another subsidiary in a lower tax have like the island where they pay 10%. That has been addressed in this Budget or they mentioned that they will address it and there will only be in future, 30%. The tax that you can write back against your profits will be capped at 30%. So, that’s a big move in the right direction but he couldn’t do anything apart from looking for a few loopholes here or there. He could do nothing to raise the revenue, He can do very little to raise the economic growth rate because that requires stimulation and stimulation you can only do when you have money in the bank, not when your borrowing is very, very high. 

He could not borrow less because he’s at a situation that they’ve done their best in Treasury and they’ve done – under the circumstances – incredibly well to keep the spending down to an overshoot of only R17bn when you consider all the money has been pulling out of our pockets and SAA as well. Now, you can’t say ‘just cut Eskom off’ because that would be cutting your own electricity off so you can’t let that implode. You have no option but to support Eskom and just see this thing through. Your other option there is to try and fix Eskom as quickly as possible and there’ve been some big moves on that one. Splitting Eskom into three, making it more competitive, and each of those units will then again be split. 

You might remember this time last year, Pravin Gordhan went to great details to explain that on the manufacturing of electricity side, they’re going to put Eskom into three different units where they’ll have a low cost, a medium cost, and a high cost power plant competing against each other. So, you’ve got these three companies, which are within Eskom, which will compete against each other and people in the private sector so there are a lot of things that are being done to address the situation but not right now., There’s nothing he can do about it now. Mboweni was between a rock and a very hard place. If he increases taxes, they can play around and say/project that they’re going to get a lot more money than they will get in but that just means you’ll kick the can down the road, so you can’t increase taxes. 

How are you going to cut government spending? Well, there are projections of R160bn in reduction in government spending. I’m not sure…I don’t think anybody can be sure that they’ll get that right, given the record but if any administration is going to manage to cut the public wage bill, they’re the ones – the administration that’s there now. There was nothing really that Mboweni could have done within the current construct that would have got ratings agencies excited.

Just two questions on the growth forecast. Paresh wants to know did it take into account the potential downgrade while Beau wants to know if he mentioned the coronavirus or the impact that might have on the growth forecast.

Yes, there was a slight mention on coronavirus and the uncertainty that that’s causing in the international community. There was also some reference to the trade war between China and the US, which now seems to have settled down. Unfortunately, it’s the wrong time because the trade war…they have a settlement and the coronavirus comes on the scene. Maybe just look…. If you have a chance, listen to that podcast that we had with Gary and Andy Cronjé, who are South African teachers in China. It’s the second one. We did a follow-up with them and when we spoke to them about a month ago, we got a very good understanding that Corona was big stuff in China. 

Speaking to them now, it looks like China’s through the worst. Coronavirus of course, kills 2% of people who get infected, but that doesn’t mean it’s an existential threat so it looks like from what China is telling us, is that coronavirus is something that is expensive for a country but it will get out of the system in due course. So, from that side I guess if you’re Mboweni and you’re doing your Budget looking ahead, as he has to for 3 years, it’s not something that would really occupy his mind that much. South Africa is a very open economy. We must remember this. Fifty percent of our GDP…in other words, our imports and exports make up half of the economic activity in our country so we’re very open and very exposed to what happens in international communities. 

Once the global trade war settles down and one coronavirus is behind us, South Africa will be one of the beneficiaries of that. The other thing South Africa is a beneficiary of is the boom in commodity prices which again, will be supported no doubt by what happens when the global trade picks up again and that’s why the projection for the economic growth for this year – although it’s pathetic at 0.9%, it’s still a lot better than the 0.3% of last year. The big thing though on economic growth in South Africa is not really what’s happening externally. It’s what’s happening with Eskom. If we can start getting electricity into the system as he said in the SONA…he’s talking about between 3 and 9 months, bringing in 2-3000mw. 

Now, 2-3000mw is the equivalent to Stage 2 and Stage 3 load-shedding so if you can do that, you might be able to at least put a cap on load-shedding or at least give Eskom a bit of space to do maintenance that is desperately required. So, there is light at the end of the tunnel and it might not be a train that’s coming towards us but we’ve got to keep perspective in all of this. What has happened here is that Treasury was between a rock and a hard place. It’s almost like they are for divine intervention or some intervention and the intervention that could come…. we’re a lucky country. It happened so many times in the past. Gold price at $10,000.00. Well, the rest of the world will be in trouble. Platinum continuing to rise. Palladium the way it’s been going. A big oil-strike off the southern Cape coast. 

There are many things that this extremely mineral-rich country could find happens in its favour and I guess that’s what Treasury is saying. Let’s try and get our country properly structured so we can benefit next time that we have a bit of luck. Stu, is that the end of it?

Alec, you just lost me there for a few seconds but yes, that’s the end. I was going to say it was an interesting point on the coronavirus… you mentioned a 2% mortality rate. I think the SARS virus had 10%  from what I read this morning so a lot more damage but I suppose the percentage increases when the virus comes to an end, but just an interesting point on that.

Yes, that 10% mortality rate on SARS and only 2% on coronavirus so unfortunately, coronavirus seems to transmit a lot easier. I think SARS peaked out at about 8,000 total infected people. I think Corona is exponentially greater than that.

There’s a question on your thoughts on the state bank proposal. I’m not sure if you have anything to say on that, but we can probably end on that if you do.

Yes, there were two things that I haven’t mentioned – the State Bank and the Sovereign Wealth Fund. On the State Bank, it is pretty clearly targeted at low income earners who do not have access at the moment to finance and it’s positioned in that way. There’s going to be a lot of water under that bridge. The government doesn’t have money to throw around to lend to people who do not repay. One would hope that they’ll be taking a cue from Muhammad Yunus and the Grameen Bank in Bangladesh, which has transformed hundreds of thousands of peoples’ lives in both Bangladesh and India in its way on how it approaches things. 

The one thing you do know about South Africa’s policy-makers is that they do study international models and they do apply them when they have the opportunity to so I wouldn’t get all ‘hissy fitty’  about it just yet because State banks don’t have a very good record but let’s suspend the judgment there. On the Sovereign Wealth Fund, it really seems like an oxymoron when you consider it because here’s a country whose debt-to-GDP is going through the roof and here, it wants to have a wealth fund on the side. It’s like if you’ve got excessive debt and you start putting money into a savings account. Rather off your debt before you worry about the savings account. The Sovereign Wealth Fund is specifically tailored to take advantage of mineral or the state’s share of mineral rights. I don’t know. 

Maybe I’m reading too much into this but we do have a very prospective oil province just off the southern Cape coast and the big oil majors are very active there and are able now to access the shale gas which is off the coast there. There’s also plenty of shale gas in the Karoo as well so this is something that has gone off the boiler for a while but so many of the policy decisions that have been made and so many of the decisions that are made in government are done with knowledge that the rest of us don’t have access to. Could it be that there’s been another big strike off the southern Cape coast? Who knows? Could it be that with the new legislation that’s coming through on energy, that it will unlock the Karoo shale gas, which will transform this country? 

The late Tony Twine was talking on a fraction of the reserves that we know we’ve got, of employing half a million people? So, there are all of these things. So, where does the state’s share go – it’s is 20% carry – which is in line with people around the world or other countries around the world charge? Not like Zuma & Co, who wanted 80%, hence nobody was doing any prospecting. But with this government, you get a 20% free carry for government and that means the money belongs to the people. Where does that money go – just into a slush fund of to repay debt or does it go into a specific area like the Norwegians have done with the Sovereign Wealth Fund? What has been proposed here, is that that money will go into a Sovereign Wealth Fund – into almost like an investment trust that the country can build up over time. 

Maybe I’m reading too much into this but we must never forget that those who do the budgets, those who make the decisions and put the numbers together, that we only found out quite a lot later. It could be that they were quite happy not to play the ratings agency game because they know there’s something bigger coming down the line. Let’s hope so.

Thanks, Alec. It has been a very long day for you. Thanks to those of you still up. We’ll put this webinar on the website as soon as we can for anyone who wants to watch it there and we’ll also get it transcribed, which will probably happen by tomorrow sometime because videos are harder to transcribe than the pure audio. So the video should be available for all the listeners in the next half-hour on the website if they want to catch up, and the presentation will be there as well. So, that’s all from my side, Alec.

Brilliant. I think we had record viewers/access to our website yesterday.

Yes, Alec. That afternoon mail definitely drove numbers. I think it had good points and all that well-received from the community, which I think was great.

Yes, and very high numbers attending this webinar today. Thanks for coming and putting aside an hour of your time to update yourself. As mentioned earlier, if you are around next week: Johannesburg on Tuesday, Durban on Wednesday, and Cape Town on Thursday. I’d love to shake your hand. Standard Bank, our sponsors, have given us some tickets. There are still a few left so go and sign up, come and have a glass of wine or a beer and have a chat. Hopefully, I’ll be seeing you next week, Thanks for seeing us tonight. We’ll be back with the normal webinar again next month The Shared Portfolio Webinar will be up next weekend. Look forward to seeing you then. Thanks, again.