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Budget Speech 2020 and Coronavirus: matters to consider for offshore investing

Many South Africans are still basking in the afterglow of Finance Minister Tito Mboweni’s unexpectedly positive and upbeat Budget Speech last week.

Despite dire warnings from various economists, VAT did not increase to 16%, personal income tax was not hiked and corporate tax has been slated to reduce with time. 

In addition, government spending will be cut by reducing the bloated public sector wage bill and the Minister has allocated extra resources to clamp down on corruption. 

Sounds good when compared to what embattled South Africans could have heard in the 2020 Budget. But there are still several economic elephants in the room, all of which continue to point to a decidedly difficult road ahead for the South African economy. 

The economic elephants in the room

Will the feared Moody’s downgrade of SA’s sovereign credit rating happen in late March 2020? 

Prior to the Budget Speech this seemed inevitable. But now there are many experts who believe that Mr Mboweni’s efforts to cut state spending and reduce the huge budget deficit may have done enough to keep Moody’s at bay. But only for the time being, as even those economists who are bullish believe a downgrade will hit the SA economy in late 2020. 

Despite the best intentions of the Finance Minister, and indeed President Ramaphosa, is there a genuine likelihood of the public sector wage bill being cut in any meaningful way? Cosatu and the powerful union bloc will undoubtedly oppose it. Plus, there are public sector wage agreements in place until 2021, which presumably means any decisive action could only take place next year anyway.

Corruption, too, will be hard to root out and punish. It does, after all, often have its epicentre in government and the public service – which is precisely where the ANC has a significant powerbase. So expect significant pushback on this initiative too.

Similarly, any steps to limit support to the cash-guzzling SOEs seem hazy, at best.

Moody’s itself has said that, even if the government hit its planned spending restraint with a deficit of 1.1% of GDP by 2022, this would still be too wide to stabilise the debt burden. So dig a little deeper into the post-Budget Speech economy and things still look decidedly gloomy, despite the seeming good cheer of the Finance Minister and his laudable efforts to tackle the big problems.

Coronavirus impact: SA a bobbing cork in a global sea 

Of course, right now you can’t analyse any economy anywhere in the world without considering the impact of the coronavirus. While South Africa is at the absolute periphery of the outbreak, the mere fact that the SA economy is a small emerging market cork bobbing uncontrollably in a global sea of economic turmoil means that the rand and local markets are highly unstable.

One only has to look at the significant drops experienced last week by the rand and the JSE to see evidence of this. Given the way the virus is continuing to spread, expect the local turmoil to continue for the immediate future.

Where can you find a currency safe haven?

Where then, should South Africans wanting to minimise the risk to their hard-earned assets look for a long-term currency safe haven?

Perhaps surprisingly, investing in the pound is a good way to spread currency risk right now. Obviously there is a measure of volatility in the immediate aftermath of Brexit and at the time of writing the pound is at a three-month low to the euro. Expect this to continue in the short term as UK and EU negotiators lock horns over the details of the exit agreement.  

But in uncertainty, there is also opportunity. Capitalising on well-priced sterling now will set you up for when the currency begins to strengthen again, as we predict it surely will. 

Post-Brexit volatility of the UK market is, we believe, a short-term scenario. The usually conservative International Monetary Fund (IMF) announced in mid-January that it expects the British economy to grow by 1.4% in 2020 and by 1.5% in 2021, providing the UK’s exit from the EU is orderly. This is better than for the euro zone, which the IMF forecasts will grow at the lesser rates of 1.3% this year and 1.4% next year. 

Of course, the rapidly evolving coronavirus situation could skew these figures. But it is a global phenomenon which should not hit the UK any harder than anywhere else. Probably less so than some, give the relative sophistication of the British health system.

What’s the next step?

For large forex transfers it’s important to consult an expert, as mistakes can be costly and difficult to rectify later. DM

For more information on this and more, the team at Mercury FX International are trusted specialists. They offer free-to-have multicurrency accounts capable of holding many currencies indefinitely, as well as better-than-bank exchange rates. They will also gladly assist with applications for tax clearance should you need to send out more funds than your allotted annual SDA of R1 million.

For more information contact the Mercury team here, or to sign up for a no obligation and free-to-have account click here: Mercury Sign Up.


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