The recent relative strength of the Rand can be partly attributed to the market’s positive perception of the election of Cyril Ramaphosa as president of the ANC. In fact, the market has largely perceived his election more favourably than the three rather radical official policies that came out of the same ANC conference where he was elected. These are:
– Nationalization of the South African Reserve Bank (SARB)
– Expropriation of land without compensation
– Free tertiary education.
Whilst investors are keeping a close eye on all of these policies and how they will be implemented, the last of these has gained particular national media attention.
South Africa’s current budget shortfall is in excess of R50bn and free tertiary education for lower income persons is expected to result in a funding shortfall of R61bn over the next 3 years. It is expected that Malusi Gigaba will, in his upcoming national budget speech in February, announce his plans to help fund this widening shortfall.
Shortly after Mr. Gigaba’s budget speech, the world’s most significant credit ratings agency, Moody’s Investor Services is expected to announce their decision on whether or not to downgrade South Africa’s Rand denominated debt rating.
If Moody’s do decide to downgrade our Rand denominated debt to junk, interest servicing costs will likely rise, as South Africa’s debt will be excluded from the world’s main sovereign debt indices. This will likely place further pressure on funding the local fiscus and in turn, will also potentially place pressure on the Rand / USD exchange rate.
StatsSA recently published an infographic showing the breakdown of government’s total expenditure. What’s noticeable is that government currently spends more on servicing debt than on funding tertiary education.
With debt servicing costs as well as tertiary education expenditure expected to rise, we expect tax rates, especially amongst the wealthy, to increase in order to help fund the widening shortfall.
We, therefore, remain favourable towards global investments and the use of tax efficient investment vehicles in order to help preserve and grow wealth, especially during times of increasing government pressure to fund a widening fiscal shortfall.