Finance Minister Malusi Gigaba’s mid-term budget speech on Wednesday was generally not well received by the financial services industry, with most concern arising from the figures he quoted: gross domestic product (GDP) growth for the year revised downwards to 0.7% and an estimated budget deficit of R51 billion.
Elize Botha, the managing director of Old Mutual Unit Trusts, says the lacklustre growth figures and debt levels will have an impact on your financial well-being, including your savings and investments. “With gross national debt forecast to be at 61% of GDP by 2022, by 2020/21 the projection is that 15% of the main budget revenue will be spent servicing debt.
“Gigaba highlighted some high-level plans in an attempt to turn this around, such as managing government expenditure and increasing our competitiveness, but failed to provide much comfort on how this could be achieved.”
Botha says you need to prepare yourself for harder times. “The per capita income is down, the economy is not growing, poverty percentages are concerning and business confidence needs to be restored. All of these elements place an ever-increasing burden on South African households.”
One event that may directly affect your pocket in the aftermath of the minister’s speech is a further downgrade of government debt by the international credit ratings agencies.
David Crosoer, the executive of research and investments at PPS Investments, says significant investment inflows have protected South Africa to some extent from its deteriorating fundamentals. “This could change should South Africa be downgraded to sub-investment grade, as about R100bn could flow out of our bond market,” he says.
Crosoer says the big concern is that, in order to attract overseas investors, the cost of government funding will need to be significantly higher. “Rising bond yields are likely to adversely affect the pricing of other financial assets and could impose a further headwind on the economy,” he says.
From an investor perspective, Crosoer says, short-term interest rates are likely to increase, which will probably be accompanied by increasing inflation.
He says markets are forward-looking, so, to some extent, a downgrade is already reflected in asset prices. “South Africa bond yields have risen by more than 1% over the past month, and our currency has weakened post the mid-term budget speech. Investors consequently need to think about whether the fiscal situation is likely to get significantly worse than the market expects before it gets better, or whether there is sufficient bad news already in the price to make the assets attractive to hold today.
“While it is a brave person who thinks South Africa is improving, it is always very difficult to try to time market events. Consequently, we typically advocate that investors construct portfolios that are relatively robust to either outcome materialising, although a defensive slant today is clearly justifiable. As always, investors are best served by sticking to their long-term plan,” Crosoer says.
In the midst of the uncertainty, Botha says the best ways for you to bolster your finances are by cutting down on spending on non-essentials and saving as much as you can. “It is never too late to save. It’s not all doom and gloom if you start somewhere, and soon,” she says.