A good thing

Neels van Schaik at PSG Fund Managers says that a more opportune time than present would have been hard to find.

The relaxation of foreign exchange control for companies at yesterday's mini budget therefore came as a major relief, as well as a monumental step in the right direction.

Companies would, however, still have to apply to the SARB Exchange Control Department for "monitoring purposes". Capital outflows would be staggered to avoid any major impact on the currency market.

It will be interesting to see how many companies will grab this opportunity to take capital out, seeing that managers often react to market variables in a similar fashion as private investors, taking their capital out at the worst possible time, when the currency has already fallen out of bed.

For years companies have been screaming and shouting to get their capital out of the country. Of those who were successful, only a few managed to create significant shareholder wealth. The situation now reminds one of the dog that chases the bus. The question is what will it do if it catches it?

The other very positive point that came from the mini budget was the move towards an even more expansionary fiscal policy. This is evident by the increase in the budget deficit target for 2006 of 3.5% (as percentage of GDP), increasing from the 3.2% target for 2005.

Although an increase in social spending will contribute significantly to this number, parastatals will also end up with more money in their pockets to spend on infrastructure.

Measured as a percentage of GDP, gross fixed capital formation has increased steadily since 2000, from 15% to 17%. Capital formation by private enterprises as a percentage of the total has risen from 72% in 1996 to the current 75%.

In South Africa's case a large chunk of this capital is imported, in the form of tangible as well as raw materials.

Some of the major importers such as the mining and manufacturing companies are producing goods for the export market.

Return on capital is of course an important variable for capital investment and the currency strength over the last three years have not played ball. The additional currency uncertainty and the impact this will have on the competitiveness of these industries has translated into static capital investment growth from these sectors.

The announcement by Trevor Manuel yesterday is going a long way in supporting the "go-for-growth" policy framework, which was also endorsed by our president.

We view the outcome of the mini budget as positive, but the private sector needs to come to the party for growth to be sustainable over the long run, otherwise short-term growth, which will be driven by government, will result in a cost to society in the form of higher taxes in the long run.