Cape Town - The 2014 budget speech will have an indirect impact on investments, according to Dave Mohr, chief investment strategist for Old Mutual Wealth.
The impact will vary over time and also depend on other market factors.
“Over the past five years, government’s ‘current’ spending - mostly salaries and welfare payments - has grown rapidly. This has been supportive of consumer spending and the shares of those companies that sell consumer goods and services have done well over the past five years,” he said.
In terms of tax revenue growth, a government’s tax revenue typically moves in line with the overall economy, said Mohr.
“A buoyant economy generates strong tax revenue growth and could provide the government with scope to reduce tax rates. Such a scenario is positive for profits of companies that do business in South Africa."
Improving profits in turn drives share prices over the longer term.
However, in a sluggish economy, which doesn’t generate enough tax revenue for the government, tax rates might have to rise, putting pressure on company profits.
“Our government has already increased dividend withholding tax (DWT) and capital gains tax (CGT) rates over the past year – tax rates that are directly applicable to investment returns,” he said.
Mohr, however, expects government will be reluctant to hike tax rates in an election year and prior to the completion of the current review on tax reforms by the Davis Tax Committee.
Mohr said government is eager to encourage savings, particularly retirement savings.
“Government has been introducing measures to improve the attractiveness of retirement fund contributions, and could be looking to change the way interest income is taxed,” he said.
He said government has indicated that it will reduce the real growth rate of its expenditure to roughly 2% per year in real terms over the next three years.
This is in an attempt to bring the budget deficit down and thus stabilise the overall public debt level at around 40% of GDP.
“The four major growth drivers of the local economy are consumption expenditure, fixed investment, government spending, and exports. If government spending slows relative to overall economic growth, while at the same time tax rates don’t fall, it means government will be a drag on overall economic growth," he said.
"Fixed investment, already stuck in first gear, tends to be the first casualty of a slowdown in overall spending and consumer spending is also likely to downshift gears, as the pressure on household finances build."
Under such a set of circumstances the economy will then need to rely on its export sectors to boost economic growth and this is where a weak rand is welcome. We have already seen the shares of companies that earn the bulk of their revenues overseas do very well on the JSE.
Mohr added that slower government spending growth could also affect the SA Reserve Bank’s interest rate decisions and result in less aggressive interest rate hikes.
He said, while government intends to – and absolutely has to – slow its current spending and increase its capital spending on expanding the country’s infrastructure, the shift from current spending to fixed investment spending has been slow and is unlikely to shift dramatically given current revenue constraints.
Market and credit ratings agencies have become wary of emerging economies with large "twin deficits".
As a result the rand has depreciated and bond yields have risen, making any future borrowing more expensive for the government.
“Yields have risen in part because the market is concerned about the sustainability of government finances and higher government bond yields push up longer term private sector borrowing costs," said Mohr.
"Similarly, any change in the government’s credit rating will filter through to domestic companies’ ratings too, potentially further increasing borrowing costs across the board.”
Mohr saod the government needs to convince the market and ratings agencies of its seriousness in narrowing the deficit, which would relieve upward pressure on interest rates and potentially take pressure off the currency.
“For investors holding bonds, this could see the value of their bond holdings appreciate. On the other hand, higher yields present a buying opportunity for those not currently holding them,” said Mohr.
The impact will vary over time and also depend on other market factors.
“Over the past five years, government’s ‘current’ spending - mostly salaries and welfare payments - has grown rapidly. This has been supportive of consumer spending and the shares of those companies that sell consumer goods and services have done well over the past five years,” he said.
In terms of tax revenue growth, a government’s tax revenue typically moves in line with the overall economy, said Mohr.
“A buoyant economy generates strong tax revenue growth and could provide the government with scope to reduce tax rates. Such a scenario is positive for profits of companies that do business in South Africa."
Improving profits in turn drives share prices over the longer term.
However, in a sluggish economy, which doesn’t generate enough tax revenue for the government, tax rates might have to rise, putting pressure on company profits.
“Our government has already increased dividend withholding tax (DWT) and capital gains tax (CGT) rates over the past year – tax rates that are directly applicable to investment returns,” he said.
Mohr, however, expects government will be reluctant to hike tax rates in an election year and prior to the completion of the current review on tax reforms by the Davis Tax Committee.
Mohr said government is eager to encourage savings, particularly retirement savings.
“Government has been introducing measures to improve the attractiveness of retirement fund contributions, and could be looking to change the way interest income is taxed,” he said.
He said government has indicated that it will reduce the real growth rate of its expenditure to roughly 2% per year in real terms over the next three years.
This is in an attempt to bring the budget deficit down and thus stabilise the overall public debt level at around 40% of GDP.
“The four major growth drivers of the local economy are consumption expenditure, fixed investment, government spending, and exports. If government spending slows relative to overall economic growth, while at the same time tax rates don’t fall, it means government will be a drag on overall economic growth," he said.
"Fixed investment, already stuck in first gear, tends to be the first casualty of a slowdown in overall spending and consumer spending is also likely to downshift gears, as the pressure on household finances build."
Under such a set of circumstances the economy will then need to rely on its export sectors to boost economic growth and this is where a weak rand is welcome. We have already seen the shares of companies that earn the bulk of their revenues overseas do very well on the JSE.
Mohr added that slower government spending growth could also affect the SA Reserve Bank’s interest rate decisions and result in less aggressive interest rate hikes.
He said, while government intends to – and absolutely has to – slow its current spending and increase its capital spending on expanding the country’s infrastructure, the shift from current spending to fixed investment spending has been slow and is unlikely to shift dramatically given current revenue constraints.
Market and credit ratings agencies have become wary of emerging economies with large "twin deficits".
As a result the rand has depreciated and bond yields have risen, making any future borrowing more expensive for the government.
“Yields have risen in part because the market is concerned about the sustainability of government finances and higher government bond yields push up longer term private sector borrowing costs," said Mohr.
"Similarly, any change in the government’s credit rating will filter through to domestic companies’ ratings too, potentially further increasing borrowing costs across the board.”
Mohr saod the government needs to convince the market and ratings agencies of its seriousness in narrowing the deficit, which would relieve upward pressure on interest rates and potentially take pressure off the currency.
“For investors holding bonds, this could see the value of their bond holdings appreciate. On the other hand, higher yields present a buying opportunity for those not currently holding them,” said Mohr.