Financial advice critical as government enters self-inflicted debt and growth spirals

The slower than anticipated relaxation of South Africa’s lockdown restrictions will result in the country posting a worse GDP growth number than forecast by either National Treasury or the South African Reserve Bank (SARB). Asset manager, STANLIB South Africa, has pencilled in an 8.6% contraction in GDP for the full year, alongside expectations of a staggering 40% fall in quarter-on-quarter growth for the second quarter. “We expect growth to rebound by 2.9% in 2021,” said Ndivhuho Netshitenzhe, economist at STANLIB; but it could take at least three years for the economy to recover to 2019 levels. She was presenting during a media webinar, hosted by Liberty, to introduce a report titled COVID-19 Future Trends.

A lockdown hangover of epic proportions

Government’s efforts to rein in alcohol and tobacco consumption through pandemic has done little to save South Africa Inc from a lockdown hangover of epic proportions. Economists have long observed that while lockdown may have been necessary, its effects will be long lasting.  They predict that thousands of small and emerging enterprises (SMEs) in the services industry will close their doors in the coming months. “Pandemic is resulting in significant damage to the economy and deep human cost, in terms of loss of life and impact on physical and psychological wellbeing,” noted David Jewell, Liberty’s Group Executive for Retail Solutions. An immediate consequence of business closures is that the country’s already frightening debt and unemployment statistics will worsen significantly. 

STANLIB predicted that the economy would shed more than 1.8 million jobs in the 12 months to June 2020. “We can expect a huge reduction in consumer spending as the percentage of discouraged and unemployed workers, having reached 39.7% at the end of the first quarter of 2020, increases,” said Netshitenzhe. The asset manager added its voice to the many who have observed that the rate of youth unemployment has reached crisis levels. Latest statistics confirm that 70% of 15-25 year olds who are not studying are without a job. “Government and policymakers must show more urgency in addressing the youth unemployment crisis that was building pre-COVID and has simply accelerated through lockdown,” she said. 

Consequences of net dis-saving

An SARB assessment of household savings suggests that financial advisers will have their work cut out for them in the coming years. Households were net dis-savers in 2019 and it looks certain this trend will continue through 2020 and the following year. “We have relatively high levels of contractual savings, being the money held in pension funds, retirement annuities, and unit trusts; but the level of discretionary savings, calculated as cash deposits netted off against overdrafts and personal loans, is deep in the red,” said Netshitenzhe. Households have, for many years, been living from month-to-month without building up financial safety nets for times of crisis. This meant that only a small percentage of households had enough emergency funding to survive the cuts to household income due to lockdown-related job losses and salary sacrifices. 

It is increasingly difficult to place a positive spin on economic news, given that South Africa is teetering on the brink of a public sector debt trap. We face a situation where the South African Revenue Services (SARS) will be short some R304 billion for the 2020/21 year; where our budget deficit as a percentage of GDP will reach 14.6%; and the best case multi-year estimate of our debt-to-GDP ratio exceeding 80% until at least 2027/28. The only way to avoid a fiscal meltdown is for government to implement reforms that will massively reduce expenditures while creating an environment conducive to economic growth and job creation. Government has made a long list of promises in order to secure initial IMF funding, including: 

• Introducing a debt ceiling in addition to the nominal spending ceiling;
• Implementing zero-based budgeting for national and provincial departments;
• Taking measures to reduce public sector wages to GDP;
• Making support for SOEs strictly conditional on the entities meeting key performance indicators;
• Strengthening enforcement in revenue collection;
• Removing structural constraints to growth, including deep reforms in product markets to remove barriers to domestic and foreign investment; and
• Refrain from intensifying exchange controls, trade restrictions, or other measures or policies that would compound the country’s balance of payments difficulties 

Rushing headlong into a debt trap

“If government does not implement the promised reforms then we risk rushing headlong into a debt trap, crashing over a fiscal cliff, and will [be forced to] seek an IMF rescue package or implement even less popular policies,” said Netshitenzhe. She added that debt stabilisation would require structural changes: “Treasury has committed itself to tackle these reforms, with [the recent] introduction of a sustainable infrastructure development initiative being a step in the right direction”. 

What can your clients expect as government battles its self-inflicted debt and growth crises? Firstly, they should remain prepared for a possible second wave of COVID-19 and everything that this would mean for their personal finances. Secondly, they can expect some reprieve from tax increases, as there are no new tax policies beyond the usual bracket creep for the next five years. And thirdly, given a bit of time, they can look forward to government taking the first gradual steps to right the mess we find ourselves in. 

Financial advice will be crucial in assisting households to navigate these difficult times. “We believe that it is during these unprecedented times that we show the importance of being and staying insured, and that expert financial advice is critical to preserving and protecting one’s future financial health,” concluded Jewell. The pandemic-linked uncertainty presents opportunities for you, assisted by your insurance partners, to meet your clients’ evolving needs. 

Writer’s thoughts:
It must be incredibly difficult for a financial adviser to keep his or her clients on track during periods of economic turmoil. Your clients are drowning in daily news stories about company liquidations; job losses; and poor economic prospects, to name a few. How do you ensure that your clients stay committed to their financial plan and financial objectives during periods of crisis? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.