#Budget 2015: Martyn Davies – How would BRICS judge Nene?

Frontier Advisory CEO and China specialist Dr Martyn Davies reckons SA’s BRICS partners wouldn’t be applauding the 2015 Budget Speech. He worries that the inability to address serious structural issues, once again evident in today’s Budget, is continually eroding SA’s potential growth rate – and with the other BRICS barring China struggling, members of that geopolitical grouping are unlikely to be much help. Fascinating insights with a clear warning – SA could be heading towards becoming Africa’s Japan; home to great multinational companies but a terrible domestic environment. – AH

This podcast was made possible by BrightRock, the company that introduced the first ever needs-matched life insurance.

 In the studio here with me. is Martyn Davies.  The 2015 Budget is now something of the past.  The big, standout issue is R17bn extra that motorists are going to be paying per annum, in the new fuel levy. Martyn, I remember when they introduced the fuel levy many years ago, Trevor Manuel was on a television program with me, and he got quite angry when I said to him ‘that this is another milk cow that you guys have got’.  Politicians seem to do that though.  They have something and they’ve just milked it now – this time, for 80 cents/litre. 

Certainly, it is significant. If oil had no collapsed in price, to literally half-priced oil over the last few months, we wouldn’t have that leeway to put in that tax and it’s arguably, the easiest way to tax urban middle class consumers.  If you can afford to own a car then you can afford the petrol that goes in it.

That strategy is throughout this Budget. You’ve got higher transfer duties for properties, for instance.  That’s gone up to 11 percent, from eight percent on everything over R2.25m. It is not exactly an expensive house nowadays.

Certainly, we’ve seen a lot of tax creep here, and rather than address the real issue, arguably, is that it’s the cost of a State, which I believe has increased almost 30 percent in the last five or six years or so.  We should be cutting the cost of the State, rather than being more punitive on the more productive private sector. 

A big concern for anyone looking at the numbers objectively is the way that Government’s debt to GDP ratio has been surging.  It will get to 44 percent now.  I did talk to the guys at the Treasury, who said ‘no it will level off at this level’ but it was 38 percent three years ago. It was 32 percent ten years ago.  These are from a global context.  These figures must be starting to wave a flag.

Yes, if you are comparing us to economies in southern Europe, or European countries, typically even Japan amongst others, we are still relatively very low.  However, in the current global economic environment, these countries economy states have to work for growth, so we shouldn’t be complacent around this.  I fear at times we certainly are, and our economic performance is mimicking that of a pretty much a West European economy right now.  If we believe somehow, that we can incrementally increase the debt of the State because we’re comparing ourselves to a West European economy, I’m afraid that is the wrong way to go. 

One of my greatest learning periods was when I lived in South-East Asia and North-East Asia, during 1996/1997, during the financial crisis and we saw then, how states were forced.  They didn’t have the luxury of time or incremental increased debt over many years. States were forced to cut costs dramatically, literally overnight, from Singapore, Taiwan, and Malaysian to the Indonesians, in particular Seoul in South Korea.  It was dramatic.  I’m not saying that the situation here warrants that but let’s not waste a good crisis.  There has been global crisis. We rode it through but now the danger is complacency and countries, us in particular, along with our due collaborators (think of BRICS, and the likes of Indians, and the Brazilians certainly), we need to work the growth and we need to drive that growth upwards, beyond one to one-and-a-half percent, which I’m afraid is not a good performance.

Well, only in October, the estimate for growth for this year was two-and-a-half percent.  That has now been cut to two-percent by Treasury itself, and we know they often overshoot. How would our partners in BRICS (if we can call them that – Brazil, Russia, India, and China) be looking at what South Africa is doing, in the light of this big day of the year, for the Finance Minister?

I think particularly, in terms of BRICS specifically, I think countries are far more internally focused.  Think of Brazil and India right now, of domestic ‘structure reforms’, which are desperately overdue in both countries’ cases, arguably ours as well, increasingly. We are not in the same depths (arguably) as what Brazil and India are but they are starting to turn around.  I think India is turning around slightly.  It’s a big ship to turn.  I’m afraid that Brazil is arguably, a ‘no solutions Government’.

The first amongst the emerging market equals are the Chinese who appear to be the only emerging market economy, able to engineer and drive its own growth.  They are just below seven.  Nevertheless, it is still very high.  I put a column in The Financial Mail this week talking about the fact that we’ve had all these emerging market acronyms, be it CIVETS, be it MINST, or be it BRICS. These are merely fads. 

BRICS is more of a geopolitical grouping these days then a real economic one, to be honest.  I think the South African Government still believes our geo-economics thrust should be BRICS, rather than your traditional Western economies.  I think that is somewhat overblown, so how are other BRICS economies looking at us?   

Well, are they are looking at us, given what you’ve said?

I think the Russians particularly are, but I think Russia has problems, which are largely insurmountable.  At least this year Russia’s debt liability is a share in a plunging Ruble environment – dramatically cut export earnings, drop of confidence, and balance of payment challenges.  I think Russia, increasingly this year; will be again having its own challenges.  If Russia sees out the year, without going bankrupt, I would be positively surprised. 

What about the BRICS Development Bank, again it was mentioned in the Budget Speech, and one of the cheers that was raised, when Nhlanhla Nene said, “The first branch office will be in South Africa,” of this new BRICS Development Bank.  Russia are in trouble.  South Africa doesn’t exactly have anything extra.  India has its own issues and, as you say, Brazil is going nowhere, so is this going to be called The China Development Bank? 

Look, is it Chinese Sovereign Wealth in disguise?  Arguably, it is, but it is labelled something else, with some window dressing of equal governance amongst the other players. I think our strategic push towards supporting the BRICS Development Bank or New Development Bank, is clearly tight or energy strategy.  Think nuclear.  Think Russia particularly but I think, of course if the Chinese are the ultimate provider of finance, because Russia won’t be in a position to provide the finance, arguably, this time next year.  If the Chinese are providing the finance then clearly, there won’t be the South African nuclear billed, being Russian led. I’m afraid that will change quite quickly.

It’s quite interesting because, again, in this Budget there was reference to that, in that there are five countries that have bid for it. China being one, as well as Russia, as well as the United States, and France and South Korea. If we just go back to what you’ve said;  If Russia has got no money and China is bidding against them, are they going to fund South Africa to buy a Russian product? It sounds a bit strange.

Well, I don’t think so.  Again, the ultimate irony of BRICS is to align, in respect of commercial interests.  It is not possible to happen and I think to believe that the BRICS New Development Bank is somehow some sort of counterweight to The World Bank or some counterweight to the IMF in terms of Stabilisation Fund, I think that is wishful thinking.  I think we’re seeing, again the rapid shift in the balance of power back to the developed world, particularly of the U.S. and increasingly (in many cases), the hype of the emerging markets is now, unfortunately, on a backburner.  The growth stats clearly reflect that.  China aside, and maybe India aside, so the world has changed.  The more it changes, the more it stays the same, and our foreign allegiances need to reflect that.

Generally speaking on the Budget today – I know you haven’t had a chance to really, go through it in detail – it does appear to be one where it will be welcomed by the Constituency that the ANC (their ruling party) looks after.  It won’t be welcomed by the Constituency of the official opposition, as the rich are going be get taxed more.  They aren’t being hurt with capital gains taxes or dividend taxes but anyone earning more than R37.500.00 per month will pay more tax next year despite fiscal drag, because of that increase.

Alec, for me, I take a slightly different position.  Honestly, I don’t think your average South African will really care what the tax rate is.  I’m being very provocative here.  What’s more important is we want an accountable and effective State.  I don’t want to hear about developmental States.  I want to hear about performance States, and we all pay tax, no matter what rate it is, no matter what your income is.  We are all in the same boat here and we expect merely three things in return.  We expect personal security.  We expect to walk into a public hospital and walk out in a relatively short period of time feeling better, and we expect to be able to send our kids to Government schools, and come out smarter and career competitive.  If we are not getting any one of those three basic services (and that’s the Citizen’s State Contract); if the State is not living up to that contract then any tax rate is too high.

There are 188 000 people, according to the Treasury numbers, who are contributing one-third of the taxes of South Africa, of income tax.  That’s two-point-eight percent of taxpayers.  On the other end of the spectrum, eight-and-a-half million registered taxpayers, pay no tax at all.  My question to you is this; this Budget is putting more weight onto the 188 000. Is that golden goose, that very admired tax base, which people in other parts of Africa, are they starting to feel a little bit of pain?

I think, again, there’s vulnerability there.  There’s not too much blood left out of that stone that can be extracted.  I think that via slippage, we’re becoming a welfare state – welfare for the masses and consumerism for the elite.  I forgot who said that but it is very true. 

What this economy needs is growth.  It really does.  People talk about inclusive growth, or quality growth, but ultimately, we need headline growth figures.  There’s no reason why this economy right now should not be getting (think India here) four percent plus economy or four percent growth GDP. 

Yes, the head wins are against us, globally.  We’ve had an incredibly enabling decade to a decade-and-a-half, from 2000 onwards, from [inaudible: 11:26] different commodity super cycle.  We are, after all, predominantly a resource driven economy and fortunately, we still are.  We’ve had quantitative easing/ free money out of the U.S. Federal Reserve coming into emerging market.

We’ve had the best of times.

There will never be a decade, for the rest of my career, as there has been the one past, in terms of enabling.  A small stat for you: in the year before the financial crisis in 2008, how many countries grew at five percent or more?  The answer is 114.  If you did not grow, you had to try really hard to fail, arguably and a couple of countries did but five percent was the norm.  That was not even a speed limit.  It was the norm growth.  Now, five percent, I’m afraid, is wishful thinking, in most cases, so the global headwinds are certainly there against us – what States need to be and I’m afraid, we don’t seem to be measuring up, when I’m thinking about our Asian competitors particularly.  Think China.  Think the smaller ones.  South Korea, Singapore, and those economies.  We need agility.  We need efficient States.  We need performance States (I alluded to that earlier) and ultimately, States that are extremely pro-business.  That is where the innovation, the wealth creation comes from and ultimately, the tax base.  As you say, ours is rather thin.

Martyn Davies, is the Chief Executive of Frontier Advisory and this podcast was made possible by BrightRock, the company that introduced the first ever needs-matched life insurance. 

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