Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at Old Mutual Investment Group. This is Macro Perspective 45.

Peter Brooke  00:06

And I'm going to talk about last week's Medium-Term Budget Policy Statement. Overall, it was disappointing, but it wasn't a big surprise. If you don't do your homework, it isn't fun getting your report card. The bad news is that debt continues to grow, and peaks at a dangerously high 95% of GDP. This compares to the government's own forecast in June of a peak of 87% in GDP to represent some slippage. 

Peter Brooke  00:34

However, the South African government is caught between a rock and a hard place. If they cut back expenditures too much, this will hurt growth, which the economy can't afford. This is a global phenomenon, and our budget deficit and  increase in debt, is actually in line with the rest of the world. I was surprised to hear the representative for the IMF in Latin America actually congratulating Brazil on spending more money in terms of their fiscal slide. 

 So, that whole world is shifting a little bit away from austerity. It's also important to maintain perspective. And I'm surprised by South Africans who complain about our debt to GDP of 82%, but are actively buying Portuguese citizenship, with a debt to GDP of 134%. 

 Peter Brooke  01:20

 Other bad news was the bailing out of South African Airways, which is unjustified, and the continued growth of contingent liabilities. Listening to a conference on Brazil's privatisation programme, in comparison, we are bleeding ourselves to death. 

 There was some good news though. Firstly, there was no change in the expected tax increases. This shows clearly National Treasury's belief that tax to GDP is as high as the economy can sustain. In other words, we're at our marginal tax rate. Secondly, the National Treasury eased regulations on inward listings. This is essentially a further relaxation of exchange controls, which is the opposite of what most people fear. 

 Peter Brooke  02:05

 But going back to that Portugal example. South Africa does not have the luxury of Germany to bail us out. Therefore, we have to live within our means. And this is going to require a massive fight between government and the trade unions. In South Africa, public wages have grown sharply over time at roughly 2% real. As a result, 95% of civil servants now earn more than the bottom half of registered taxpayers. So, civil servants are better paid than the average person out there. Now the private sector is under immense pressure. And basically, everyone either has wage freezes or wage cuts. 

 Peter Brooke  02:44

 So, this gap will widen. Our fiscal credibility rests on government scaling back its wage bill, so we can expect a lot of protests and strikes. But I would say that if we see burning tires, this might actually be good news for our bonds. For now, the price compensates for the risk on our bonds, but hard work lies ahead. I hope you enjoyed this perspective.