Volume 19 Issue 2 – March 2021

If you can’t convince them, confuse them – Harry S Truman

COMMENT AND OUTLOOK – A Budget That Must Stick

Finance Minister, Tito Mboweni, delivered a 2021 Budget that has been received with some surprise, relief and scepticism. The surprise is that the state of the country’s financial position is better than the forecast that was made towards the end of last year in the Medium Term Budget presentation. The primary reason for this is that there was a significant increase in the taxes collected from the mining sector as a result of the overall improvement in that sector. The relief that the budget brought was that there were no increases in direct taxes. There was in fact a decrease in personal taxes through a 5% increase in tax bracket ranges and a decrease in Company tax from 28% to 27%. There were quite steep increases in excise duties, particularly on alcohol. The budget was also about curtailing runaway government expenditure and the key targets were the public sector wage bill and the social grants. There was no provision made for any increase in public sector wages and social grants were barely adjusted at all. Those are quite bold steps with the wage freeze already being challenged by the unions and the social grant adjustment being criticised as not assisting the most vulnerable in the country. The scepticism around the budget is whether the overall budget framework will be adhered to in the face of what is going to be quite significant pushback, particularly from government employees. It is essential for the country to demonstrate that it is taking serious steps to bring the increasing levels of government borrowing under control. The only way that message will be communicated is by government sticking to the proposed budget. Currently, 20% of tax revenue collected is spent on servicing government debt which is projected to rise to 82% of GDP this year.

Another very important measure to rein in government spending is the elimination of corruption and the associated wasteful and unauthorised expenditure. A lot of the unnecessary expenditure is through lack of management oversight and controls but sadly corruption has led to goods and services supplied to the state, costing significantly more than they should. The repurposing of the state under the leadership of President Ramaphosa is taking place but at an inordinately slow pace. Interestingly, SARS and the NPA received increased budget allocations and SARS is now establishing a unit to specifically deal with tax investigations into very wealthy people. These are 2 crucial institutions in the efforts to re-establish a competent state and it is encouraging that resources are being provided for them to deliver on their mandate. There has been so much revenue leakage over the past few years as a result of the very poor management of SARS, that getting it back to its former levels of efficiency is vital for the financial health of the country. An efficient NPA, that is able to successfully prosecute those who are involved in corruption is also an essential part of turning the country around. The message needs to get out that corruption is not an accepted practice but in fact a punishable crime.

The Covid pandemic continues to have an impact around the world with continuing lockdowns and curtailment of economic activity. Vaccine rollouts are progressing quite successfully in many countries and this will hopefully lead to a normalising of economic activities during this year as the pandemic is overcome. The fact that good progress is being made with vaccine programs helped to lift equity markets during February in spite of a late month pull back. Most international markets were positive for the month and the JSE also had a strong month led mainly by the resource sector once again, but with gains across other sectors as well. The oil price continued to rise during the month as the OPEC production cuts are maintained and bad weather impacted oil production in the USA and Russia. The oil price is currently USD 68 per barrel whereas just over a year ago it was less than USD 20 per barrel. There has been some weakness in some of the commodity prices recently and gold has fallen below USD 1700 per ounce. In early March markets have weakened and the US tech heavy Nasdaq index has been particularly weak. One of the concerns facing the markets is the increase in the key US 10 year treasury yield which has risen to above 1.5% from below 1% a short while ago. The US 10 year treasury yield is a key benchmark for interest rates and traders will be watching to see if the US Federal Reserve intervenes to try and prevent any meaningful rise in interest rates. The concern is that if interest rates start rising from their very low levels because of inflationary concerns, it could cause significant turbulence in global financial markets. Very low interest rates have given comfort to equity market investors and whilst a short term rise in US bond yields should not be a cause for concern it can have an unsettling effect on markets.

It is a year now since the real impact of the Covid pandemic started being felt around the world. It has been roller coaster year with a massive impact in terms of loss of life, illness, and disruption to what was regarded as normal social and economic activity. As the signs start to appear that a successful vaccine roll-out is attainable, we have to start considering life beyond the pandemic. What will the new normal be? Whatever it is, let us hope it is a better future and environment for all.

Twinoaks Investment Management (Pty) Ltd (Twinoaks) is an FSB approved Discretionary Financial Service Provider – No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks