‘Downgrade to junk won’t be the end of the world’
In general, the cost of capital will rise. But the cost of capital is related to risk, and there are sectors of the South African economy that remain resilient and attractive to investors.
The key issues likely to emerge from Minister of Finance Tito Mboweni’s Budget this year are:
* Should the minister take a fiscally conservative or fiscally stimulatory approach? The country needs a stimulatory Budget. We all know there are challenges, such as high unemployment, poor education outcomes and Eskom’s inability to deliver stable, affordable power. Addressing all these issues demands a practical mindset on the part of the minister to stimulate industry and the economy, which will generate the funds needed to fix these issues.
* Is this a good time to cut corporate and personal taxes? We are more likely to see another increase in luxury taxes and the top marginal rate, but South Africa is well into a situation where a limited pool of taxpayers is being overtaxed. The government allows taxes to increase through “bracket creep” every year, which throttles investment.
If the government lowered corporate and personal taxes, it would stimulate investment and employment and ultimately widen the pool of taxpayers.
* Should the minister announce investment incentives? There’s a huge need to incentivise investment in businesses and infrastructure, given current political and economic challenges, which have affected investor confidence.
Merger and acquisition (M&A) activity happens when the economy is growing. We have to make it easier to do business in South Africa. One of the ways to do that would be to facilitate visas for highly skilled immigrants, who will transfer skills and generate new jobs.
* What should be done to fix the state-owned entities (SOEs)? Many of the SOEs are having a significantly negative impact on the economy and are draining government resources. These SOEs should be shut down or privatised, although Eskom is in a separate category. It would be far better to divert the billions of rand being used to bail out SOEs towards sectors that could benefit from an injection, such as agriculture or renewable energy.
The amount of money that has been wasted on the SOEs is criminal.
* Should the government tap into pension funds to help Eskom? It is positive that Cosatu has come forward with suggestions on how their members can be part of the solution to help Eskom through its financial difficulties.
Tapping workers’ pension funds may be the lesser of two evils if the alternative is to lose jobs, and if the end result is to revive Eskom and stabilise the economy.
But it is a dangerous path to tread. Pension money can be accessed only under very strict conditions and there will have to be a plan to pay it back.
* What should be the focus of the minister’s spending? Education and justice are top priorities. On education, South Africa has an urgent need to widen its intellectual capital.
The Justice Department is faced with a major task to clean up the public and private sectors after years of corruption and reassert high standards of governance.
Another important spending priority should be renewable energy.
There’s also a lot of opportunity in growing the tourism sector, which entails not only streamlining tourist visa applications but also marketing the country more actively and effectively.
* How can the minister’s Budget stimulate M&A activity? There’s a lot of international interest in buying into areas such as fintech and information technology in South Africa. But more policy certainty and clarity are needed on issues such as black economic empowerment and land expropriation.
Deal Leaders Africa holds annual investor seminars and our delegates are showing interest in buying small and medium-sized South African businesses. It is a competitive market. To encourage global investors to buy in South Africa rather than anywhere else, they need to be able to price the risks, which entails understanding the policy environment and having confidence that the government policy will not change fundamentally in the next three to five years.
Andrew Bahlmann is the managing director of Deal Leaders Africa.