Shapiro’s snapshot of the South African economy

Fiscal debt and the management of this debt have emerged as the biggest challenges facing South Africa as the coronavirus pandemic threatens a second year. The country can expect a budget deficit of around 15.5% for 2021/22 while government debt to GDP threatens to break into triple-digit territory.

Under this scenario, debt servicing costs could soon gobble up a quarter of the country’s budget expenditure, leaving precious little for important areas such as education, healthcare and social welfare. David Shapiro, global equity strategist at Sasfin Securities, used his address to the FQ Financial Skills Brave New World for Retirement 2021 webinar, held 12 February, to consider prospects for the domestic economy.

A complex balancing act

Shapiro’s opening comment was that South Africa’s fiscal constraints were not unique globally. Many countries have spent billions of dollars in their ongoing struggle against Covid-19, with the result that budgets are constrained and government debt levels rising. “The big challenge going forward is how we are going to manage this debt and prevent it from growing larger,” says Shapiro. He notes that finance minister Tito Mboweni will have to make some tough decision to match expenditures and revenues without negatively impacting economic growth. It could be argued, for example, that consumption-driven economic growth will be throttled if public sector wages and other expenditures are cut too aggressively. 

“When government introduces austerity measures, they also reduce the expenditure that drives growth,” says Shapiro. “South Africa needs to resolve the many structural issues that we discuss each year if we hope to increase revenue collections”. On the flipside of the coin, if we fail to control our expenditure, we risk spending more and more of our future revenue on servicing debt and paying social grants, leaving nothing to put towards the structural reforms necessary to drive economic growth. The bottom line is that economic growth is the only way for the country to steer away from the looming fiscal cliff. 

Good news stories for your clients

There is some good news for you to share with your clients. A positive surprise on the revenue collection front, which could see the country exceed last year’s worst case forecast by some R50 billion, should be enough to keep tax increases at bay. “I do not expect any tax increases and it is unclear where Treasury would find room to implement such measures,” says Shapiro. He adds that South Africa’s tax revenue as a percentage of GDP is already high compared to its global peers. And there are fears that raising the tax burden above these levels would be counter-productive. High income taxpayers may, however, have to dock up more as the concept of a solidarity tax becomes more popular. 

You can think of a solidarity tax as a legislated charge against a business or individual on the basis that the tax is in the interest of broader society. It would, most probably, be implemented as a once-off wealth tax. South Africa has witnessed various non-tax fundraising efforts during the pandemic including the entirely voluntary Solidarity Fund, to which many local taxpayers contributed, and the regulator-inspired announcement by some private medical schemes that they would use their members’ capital reserves to part-fund the vaccination of non-members. The writer believes there is a better than average chance that a once-off solidarity tax on the wealthy will be announced in the upcoming budget. 

Another piece of positive news is that cash inflows from both foreign direct investment and institutional investors are gathering momentum. Aside from the recent investments announced by large motor manufacturers, there is growing appetite among foreign investors for South African bonds. “Towards the last quarter of 2020 we saw money start flowing into riskier assets and back into the local market,” says Shapiro. Investors are hungry for the attractive real yield on offer on our short- to mid-duration bonds. Why forego 4.5% to 5.5% real yields when the yield on so much of the global bond market is negative?

The trouble with regulation 28

A prospect that concerns many retirement fund trustees is that government could institute a grab for the country’s private savings pool. Shapiro observes that there are trillions of rand tucked away in retirement funds, which government could access by introducing prescribed assets. Many asset managers believe that the state could achieve its objectives by simply amending regulation 28 to allow retirement funds to make higher capital allocations to alternative asset classes. Fund trustees could then choose opportunities that balance risk and returns in line with fund members’ mandates. “I would prefer private-public partnerships via some sort of infrastructure fund that offers decent returns to pensioners rather than going the prescribed asset route,” says Shapiro. 

One cannot talk regulation 28 without considering the appropriateness of the regulation in modern times. You will struggle to find an asset manager who is entirely happy with the 30% cap on offshore allocations, though there is general disagreement on how the matter might be corrected. Shapiro argues that the asset class caps make it difficult for the industry to protect pensioners and retirement savers. Asset managers are battling to achieve appropriate diversification across asset classes and geographies due to these limits. An obvious issue is that there is little difference between buying JSE-listed equities such as British American Tobacco, Prosus and Richemont, which earn the bulk of their revenues offshore, versus simply buying an appropriate offshore ETF. 

“Regulation 28 does not make sense nowadays and trying to invest 45% of a portfolio in local equities is becoming more and more difficult,” concludes Shapiro. “Our equity markets do not offer access to the businesses capable of generating the returns that retirement funds need”. 

Writer’s thoughts:
We agree that South Africa’s finance minister faces a tough act to balance the country’s revenue and expenditure; but are not as confident as David Shapiro that taxpayers will not be asked to fund some of government’s pet projects. The money required for National Health Insurance (NHI) and ongoing Covid-19 relief will have to be found somewhere. What surprises do you expect when minister Tito Mboweni delivers the 2021 budget speech? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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