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With an election looming in South Africa, many expected that Finance Minister Tito Mboweni's 2019 Budget speech would largely be composed of populist messages aimed at voters.
However, he actually spoke directly to rating agencies with the goal of addressing some of their most important concerns, in the view of David French, director of tax consulting at Mazars.
State-owned entities
The first of these messages, according to French, was about the future of state-owned entities (SOEs).
"The current situation with Eskom is probably one of SA's biggest red flags at the moment, and many have said that the ongoing threat of load-shedding will be the biggest factor affecting SA's credit rating," commented French.
"On the other hand, this is the first year in anyone's memory that the minister of finance openly questioned SA's need for SOEs, implying that government is ready to start looking for alternative solutions. It may be pure optimism at this stage, but this seems like a step in the right direction."
Debt-to-GDP
The second concern of ratings agencies, which Mboweni directly addressed in his speech, according to French, is SA's growing debt-to-GDP ratio.
"The debt-to-GDP ratio is set to grow to 60.2% by 2023/2024 and recede slightly to 60.1% the following year. This is not ideal, but the fact that it is expected to grow only by 4% over the next four years, and then remain there, shows that Treasury aims to stabilise SA's debt. We will have to see if that satisfies the ratings agencies," said French.
For French, the question remains whether Treasury can deliver on the points that were raised in the Budget speech last week.
"Is the 2019 Budget good enough to keep rating agencies from downgrading South Africa? At this stage we cannot say for certain but I believe that there is a fair chance that it is," said French.
In the view of Ricardo Teixeira, CFP® and chief operating officer at BDO Wealth Advisers, Mboweni's approach was clearly to take a step back and not disrupt the status quo with any fundamental changes to tax policy nor administration.
More savings, more growth
"So, what could Tito do differently next time? Seed a culture of savings. Get South African's to harness the power of savings to bring back growth to our economy. He could very well start with compulsory preservation of retirement savings," said Teixeira.
"A primary source of tax efficient and tax frees savings are our retirement funds. By introducing punitive penalties for withdrawing from retirement funds or better yet, making it compulsory to leave retirement savings untouched when changing jobs until retirement is a powerful catalyst for a savings culture."
Denver Keswell, senior legal advisor at Nedgroup Investments, commented that to him it was disappointing that Budget 2019 did not highlight any significant attempts to further encourage savings.
Tax-free investments
"There was no mention of any increases to the limits on tax-free investments or incentives to promote retirement fund savings, which seems mismatched to the president's approach to growth and savings," said Keswell.
Tim Mertens, chair of Sovereign Trust, said perhaps of biggest concern from Budget 2019 for Sovereign Trust SA, in advising its clients on how to grow and preserve their retirement and financial planning, is the fact that Mboweni placed so much emphasis on the need to rehabilitate SOEs, such as Eskom and South African Airways.
"Yet the recent ANC ruling party manifesto emphasised the need to place a portion of retirement funds (retirement annuities) into SOEs – which would be debilitating to any investor in the current (and foreseeable) outlook," cautioned Mertens.
