This much maligned phrase from Queen Elizabeth’s 1992 anniversary speech reflected all the pain of her family turmoil and seems eminently apt for South Africans in 2016.
It is very early in the year and yet we have been on an extreme rollercoaster ride since mid-December which has left the citizenry discontented and dejected. The whole Nene affair followed by all the political intrigue around Pravin Gordhan has had a massive economic fall-out and has been front-page news virtually every day. Overlaying all of this is the continual talk of the imminent downgrade of SA’s credit status to junk status. We all probably suffer some fatigue on these issues and we have no intention to rehash these issues here.
However, we do find it necessary to put the possible downgrade in perspective – currently, our sovereign debt issued in foreign currency amounts to approximately 10% of SA’s total issued debt which is the issue at stake. The remaining 90% of the debt was issued in local currency and remains at 3 notches above junk. The downgrade of the foreign debt will therefore in itself not necessarily lead to massive capital outflows. There is a sliver of a silver lining around these very dark clouds.
The political machinations around Mr Gordhan over the last few weeks have played havoc with our reputation as a safe investment destination among foreign investors. This is clearly reflected in the extremely volatile Rand. Mr Gordhan did a sterling job in presenting a stable budget in extremely difficult conditions. The message was simple – he is not going the populist route of wealth taxes (i.e. a new super-tax bracket) that the market thought was inevitable. He is leaving the door open for the 2017-2019 budget, therefore maximising flexibility by not pre-announcing the intended tax measures (e.g. VAT/PIT) for raising the required additional revenue. His message is clear…they will turn to the private sector for growth solutions.
The implementation of the budget proposals over the next 6 months will determine the decision of the ratings agencies on the necessity for downgrading. We are far from the other side of the wood.
Against the above backdrop, SA also has to deal with the worst drought in 30 years, an economy that is hardly ticking over, rising inflation, rising interest rates, a rapidly weakening currency, escalating service delivery problems and student protests. And all this is happening in a climate of weak global growth. It is therefore small wonder that the nation is crying out about the horribleness of it all.
Food inflation is set to rise by 15% over the next 6 months due to the impact of the weak Rand and the drought. The impact on general inflation will be significant and rising inflation will quickly erode the cash holdings even if rates are higher, especially after the effects of tax on the interest is taken into account. Investors can quickly find themselves in a negative real growth situation.
Despite the weak performance of the stock market over the past 12 months, there remain pockets of opportunities and as we are all aware the fortunes of the stock market can turn around in the wink of an eye. Selling shares now in favour of cash can easily result in having to buy the same shares back at higher prices in just a few months. Despite the slowing economy in China and the uncertainty of recovery in the US, our best advice remains to optimize international exposure to protect against the continued weakening of the Rand. Higher cash exposure only remains an option of last resort.
As the Queen got used to Camilla, so shall we live to see the sun rise again. 2016 has a long way to go and may not be the horrible year that its dawn predicted.
TAX AMENDMENTS
The requirement for provident fund members to take a portion of their retirement benefits as an annuity/pension (commonly referred to as annuitisation within the financial industry), as opposed to a lump sum, will be postponed to allow further consultation with key stakeholders. The option to transfer pension benefits tax-free to provident funds have also been postponed to 1 March 2018.
What will still go ahead as from 1 March 2016?
- The change to the tax deductibility of retirement fund contributions (including contributions to provident funds) will increase to 27.5% of the greater taxable income or remuneration, up to a cap of R350 000 per year. The continued deductibility of provident fund contributions will be reviewed after two years if no agreement on provident fund annuitisation is reached; and
- The maximum threshold required for your pension and/or retirement annuity benefit to be paid as a lump sum will be increased from R75 000 to R247 500.
Members are reminded that their rights to their retirement benefits remain secure and are not adversely affected by the recent announcement to post-pone certain aspects of the retirement tax reform.
