SA has run out of money. And time. And ideas.

Finance Minister Malusi Gigaba, in his maiden Medium-Term Budget Policy Statement (MTBPS) on Wednesday, revealed in an honest and worrying account the extent of South Africa’s fiscal and economic woes.

It now seems inevitable that SA will suffer further downgrades, perhaps even as soon as next month when Moody’s and S&P are next scheduled to review SA’s credit rating. There may be no waiting until after the ANC’s elective conference in December.

GDP growth forecasts were slashed down from 1.3% to 0.7% for 2017.

The revenue shortfall for 2017/18 is expected to be R50.8 billion, for 2018/19 R69.3 billion, and for 2019/20 R89.4 billion. As taxpayers, I’ll let those numbers sink in.

The budget deficit is now expected to be 4.3% of Gross Domestic Product (GDP) compared to the 3.1% originally forecast.

Gross national debt is to increase to 61% of GDP by 2022 with debt-service costs approaching 15% of main budget revenue by 2020/21. Imagine losing 15% of your salary to loan interest every month.

Incredulously, despite the widening budget deficit and debt ratio, government spending is still going to rise by 7.3%pa over the next 3 years. That’s right, SA will need to borrow more money in an attempt to spend its way out of this mess, by trying to stimulate growth, investment and employment. Unfortunately no-one seems to know what the government’s actual plan is in achieving this.

More worryingly, the borrowing and debt forecasts do not even account for a credit downgrade, which would have the crippling effect of making it much more expensive for SA to borrow money.

Following the MTBPS approximately R5.1 billion of SA bonds were dumped by foreign investors on Wednesday, the most in 6 years, according to data from the Johannesburg Stock Exchange (JSE). A downgrade to SA’s local currency debt by either S&P or Moody’s would push SA bonds out of widely used global bond indexes that rely on investment grades only, resulting in forced selling en masse.

The Rand weakened +/- 4% against major currencies: from 18.0 to 18.7 versus GBP, from 13.7 to 14.3 versus USD, and from 16.2 to 16.8 versus EUR. As a result the benchmark FTSE/JSE Africa All Share Index rose 0.6% to a record high. Exporters and companies with significant foreign operations benefit from Rand weakness; these shares are often referred to as “Rand hedges”.

It’s fair to say though that the local stock market is hitting these new highs for all the wrong reasons, especially given its skewed weighting to Rand hedge shares.

Hold onto your hats (and your wallets), it’s going to be a bumpy ride!

Posted in Blog, Budget, Financial Planning, Investments.