After Tuesday’s release of the country’s latest unemployment figures showing joblessness rocketing to the worst levels on record, the elephant in the room for Finance Minister Tito Mboweni was bound to be government’s policy framework towards recovery and sustainable job creation.

Set against the backdrop of an economy ravaged by the impact of Covid, the ensuing lockdowns and restrictions on economic activity, Mr Mboweni had a mountain to climb in outlining the strategy for government’s expenditure plans for the year ahead.

Importantly, the markets seemed to like what our Finance Minister had to say – the currency, bond yields, and the JSE ALSI all reacting positively to the projections presented.

To his credit, the first step in solving a problem is recognizing there is one – something Minister Mboweni has consistently done in previous speeches. From his hardy aloe ferox plant that has accompanied him at the lectern on a number of occasions, to his analogy of “the widening jaws of the hippo” when referring to government’s ever-growing gap between income and expenditure, our Finance Minister has spent many an opportunity warning his audience of the dangers of such an unsustainable path…

And yet, the speech did deliver – with a number of surprises on the upside!

1. An almost R100bn higher tax revenue than that projected in the October Medium-Term Budget points to a stronger economic rebound from the lockdowns of 2020, and should result in lower borrowings than previously expected

2. No tax increases, and even a reduction in the corporate tax to 27% (down from 28%) and adjusting tax brackets higher by 5% (providing small relief to individual taxpayers)

3. Government’s budgeted expenditure remains largely unchanged over the next 3 years, and issuance of bonds is to be reduced – possibly the most critical point for investors mentioned in yesterday’s speech. Treasury is now projecting a Debt to GDP peak of ‘only’ 9% in the financial year 2025/26 (but down from October’s projection of this breaching 95% in 2025/26)

4. Higher than expected exports, and higher commodity prices have collectively contributed to a lower primary account deficit, again lowering government’s burden

5. Treasury expects a 3.3% GDP growth rate for 2021 (off the -7.2% contraction of 2020), followed by growth in 2022 and 2023 of an average of 1.9% p.a.
   • Global growth is expected to rebound by 5.5% in 2021, with countries like China and India (a positive for us as we’re in the same WhatsApp Group!) expecting growth of 8.1% and 11.5% respectively!

6. Regulation 28 of the Pension Funds Act is to be reviewed to allow retirement investments to invest a portion of their assets into infrastructure projects. This is not a move towards prescribed assets, but rather an expansion of funds’ permissible holdings

7. Mr Mboweni has held fast on the public sector wage bill, and his refusal to award the country’s 1.2 million public servants with inflation-busting salary increases over the next 3 years appears to have paid off – at least for now…

Mr Mboweni steered clear of any populist temptation to tax an already overburdened base, but was light on detail when it comes to the structural reforms sorely needed to stimulate growth and investment. The GDP growth figures, while positive, remain benign and point to the prospect of worsening unemployment still to come.

Reducing corporate tax rates by 1% certainly shows President Ramaphosa’s government’s support of business – something we have not seen since the days of Thabo Mbeki. But is it enough to create the necessary confidence to stimulate an environment for corporates to invest in this country, to implement capital projects, hire more people, expand the value-chain, and drive the much-needed and broad economic growth? The markets (for now) seem to think so.

What does remain a worry is the absence of DETAIL in how all of these policies are going to implemented – something the Ramaphosa-ANC have yet to achieve… As Kurt Cobain told us in Nirvana’s acoustic hit Plateau way back in 1994: “Who needs action when you got words”

What counts from here is action. Nothing less will suffice.

We look forward to keeping you updated on how we see these plans being rolled out in the months, quarters, and years to come, and wish you and yours all the very best.

Steve Crouse

Chief Investment Officer and Senior Advisor