South Africa’s Finance Minister Enoch Godongwana this week presented a Budget that was uninspiring and unremarkable, apart from the announcement of government’s decision to tap into the Gold and Foreign Exchange Contingency Reserve Account (GFECRA). The GFECRA reflects movements in the value of the Reserve Bank’s stock of gold, foreign exchange, and forwards or swaps agreements.
This account reflected a positive balance of around R507.3 billion in January 2024, up from just R1.8 billion rand in 2006. Until realised by selling the underlying assets, this reflects a paper profit.
The finance minister has set the legislative wheels in motion to draw down R150 billion from this fund — just like finding billions of rand under the couch, as some have joked.
As Bloomberg notes, many other central banks run similar foreign exchange accounts and access the funds from time to time. Nations such as Switzerland, Chile, and Poland, periodically transfer some or all the gains made from valuation adjustments to the government. Such a move is, as such, not necessarily cause for alarm.
Provided that the funds are used responsibly—in other words, for purposes such as settling debt denominated in foreign currencies—this need not be a bad thing. It could help to reduce government borrowing, in the process relieving pressure on state finances and the bond markets. The Finance Minister has promised to ensure that sufficient buffers are available to absorb exchange rate swings.
However, many observers might be justifiably concerned that accessing these funds will enable the government to kick many of its challenges down the road beyond the upcoming elections. South Africa’s public finances are in a poor state, with government debt expected to peak at 75.3% of GDP in 2025/26, this percentage having increased from 30% in 2007. Debt service costs are now the fastest-growing expenditure item in the budget, and consolidated government spending will amount to R2.37 trillion in 2024/25, with revenues forecasted at just over R2 trillion. Expressed as a percentage, this deficit actually equates to 18.5%, not the 4.9% of GDP that is most commonly mentioned.
The National Budget didn’t offer much hope that the breathing room created by accessing the GFECRA would be used to fund infrastructure and programmes to foster growth. History shows that a R787 billion infrastructure investment program launched in 2009 set off a frenzy of looting and political infighting, destroying key institutions such as Eskom, Transnet, the Passenger Rail Agency, and the ports. Some 60% of the National Budget will be spent on the salaries for teachers, doctors, and nurses, and social grants, whereas debt service costs will absorb more than 20% of revenue. Rather than investing in growth, government risks maxing out its metaphorical credit card to pay for the groceries.
The finance minister appeared to walk back many of the promises he made to slash government spending in his medium-term budget framework. Cracking the kitty open could, in the longer term, facilitate more corrupt and wasteful spending. These risks will rise if a populist ruling coalition comes into power after the election.
The Budget wasn’t all bad news. It is encouraging that direct taxes such as personal income tax and fuel levies were not hiked, even if there was also no inflation relief. Yet faltering corporate tax collections, specifically the 50% drop in those from the mining sector, highlight that infrastructural investments and economic reform are desperately needed. But there is still no sign of the political will to implement these measures.
“If you’re going to do fiscal consolidation, do it as far away from the election as possible. You can’t influence an election with a budget in two months.”
– Enoch Godongwana South African Finance Minister
Global News
- Fed officials, in the minutes of the January 30/31 meeting released on Wednesday, agreed that interest rates were likely at their peak, but the exact timing of the first rate cut remained unclear as policymakers want to see more evidence that inflation is firmly on a path to their 2% target before lowering interest rates. The minutes also show most officials remained more worried about the risk of cutting interest rates too soon rather than keeping them high for too long and damaging the economy.
- The war in the Middle East poses a danger to the record rally in US stocks, according to a Bloomberg analysis of hundreds of earnings calls. Boycotts are dampening sales and Red Sea shipping chaos is threatening supply chains. By the halfway mark in the first quarter, the number of references to the Red Sea or “geopolitics” has almost matched the total for the previous three months.
- As a result, corporate America is pushing to keep the stock market from falling victim to high expectations. A recent round of rising quarterly profit reports helped drive the S&P 500 Index back to record levels, but executives are being cautious on earnings outlooks.
- Investors have pushed billions into money-market funds, while corporate treasurers are hoarding record amounts of cash. Investors have added $128 billion to US money-market funds since the start of the year, Investment Company Institute data shows. Companies were sitting on a record $4.4 trillion of cash at the end of the third quarter and after a flood of more than $1 trillion of T-bills since mid-2023. It is anticipated that this wall of cash could be deployed into equities upon any sharp market correction, or when the cost of capital is repriced through lower interest rates.
- Japan’s equity market has hit a new high, exceeding the 28 December 1989 level attained 35 years ago. Equity strategists will be excited by the drivers of the current equity high, states UBS. Economists might reflect on the dangers of extrapolating from past economic trends when forecasting future economic success, it adds.
- Nvidia’s surge to an all-time high on Thursday is the biggest single-session increase in market value of an individual stock in history! The share’s market cap rose by $277 billion, beating Meta Platform’s historic gain just three weeks ago. Nvidia reported earnings on Wednesday that beat Wall Street expectations and said revenue during the current quarter would be better than expected. Revenue was $22.10 billion vs. the $20.62 billion anticipated. The results led to a surge in indices with the S&P 500 and Dow Jones Industrial Average both notching new record highs. Given its massive influence on broader indexes, Goldman Sachs Group’s trading desk called the chipmaker “the most important stock on planet earth.” (Nvidia is held indirectly through the MSCI World Index in our client portfolio and in our houseview funds, but is also a direct holding of our quality core portfolio, which is held directly or indirectly in all our Dynasty Funds.)
- Walmart beat Wall Street’s predictions in the fourth quarter as consumer spending remained robust. Both sales and profits exceeded analysts’ forecasts with executives highlighting Walmart’s expanding market share, particularly among households with incomes exceeding $100,000 a year. E-commerce sales also rose more than expected, and more shoppers are using same-day and express deliveries. Walmart also disclosed its agreement to acquire smart TV manufacturer Vizio Holding Corporation for approximately $2.3 billion. This acquisition is anticipated to enhance the retailer’s advertising arm, Walmart Connect, facilitating increased customer engagement for both the company and its advertisers.
- Glencore’s net profit dropped 75% to $4.3 billion in its year to end-December as lower commodity prices negatively impacted the group’s sales. Revenue fell 15% and core profit halved to $17 billion as the group contended with lower prices for commodities such as coal, natural gas, and oil, which had surged in 2022. Glencore fell 1% on the news on Wednesday and has lost about 14% in the past twelve months. (Dynasty’s investment bias is towards price-making companies as opposed to cyclical price-taking companies such as Glencore).
- HSBC achieved “record profit” in 2023 as pre-tax gains soared by nearly 80%, with the banking giant also announcing further share buybacks. The Asia-focused lender and its peers have been buoyed by rising interest rates for more than a year but are bracing for greater economic uncertainties in 2024.
- As at Thursday’s close the S&P 500 was 1.63% up for the week.
Local News
- Following Wednesday’s budget speech, the rand strengthened as much as 0.8% to R18.7622 to the dollar by 2:35 pm and local bond yields dropped 10bps from closing levels to 11.57%. However, these gains have since been reversed, with the currency trading at R19.28/$ as at the time of writing and the bonds have also reversed the gains.
- The R100 billion extra funds sourced from the GFECRA are only for the purpose of reducing the need to go to the bond markets for debt that comes at a considerably higher cost, according to Moneyweb. In addition, should the rand appreciate significantly, this could leave the Reserve Bank (and by extension the Treasury), in an expensive bind. National Treasury, through accessing the R150 billion, will be able to reduce its debt-servicing costs by R30 billion over the medium-term expenditure framework, Analysts have called this move an electioneering con, a charge the finance minister has denied.
- To access a summary of the national budget a 14-minute video clip by Kevin Lings chief economist at Stanlib can be accessed here.
- South Africans will go to the polls in the national and provincial elections on 29 May. The election date was announced by President Cyril Ramaphosa on Tuesday night. The date will now officially be proclaimed in the Government Gazette. Once the date is proclaimed, voter registration will be closed.
- The current official opposition, the DA, believes it can topple the ANC following the 29 May vote. The party said it has a plan to end power cuts and turn the struggling economy around within five years if it does. It also intends to create 2 million jobs by 2029, expand the social safety net, and introduce a fiscal rule to stabilise debt. Its election manifesto leans heavily on its track record of governing provincially in the Western Cape and locally in municipalities.
- Discovery CEO Adrian Gore has warned that funding the NHI is a fiscal threat and raising taxes from a tax base consisting of taxpayers stretched to the limit of what they can endure is not the answer. Just 0.29% of the population were expected to pay 44% of the country’s personal income tax revenue in 2023/2024. Wednesday’s National Budget saw the fiscus pledge R1.4 billion to the scheme.
- Members of Parliament have unanimously adopted the “two-pot” system, which overhauls the retirement regime. Several MPs warned of the danger of workers withdrawing too much money from their retirement funds, depleting their resources for retirement. The system will come into effect on September 1.
- Shareholders at the Coronation Fund Managers AGM, held on Tuesday, highlighted a lack of liquidity on the JSE and substantial outflows of capital from South Africa. The JSE is down to 287 listed companies from more than 600 at the turn of the century, while a 2022 amendment to regulation 28 of the Pension Funds Act, allowed pension funds to increase offshore allocations from 30% of assets to 45%, leading to substantial outflows from the local bourse.
- Mining giant Anglo American is reviewing and could sell off businesses it deems are not competitive as it seeks to protect shareholder value and right-size the group for growth. The group’s year-to-end-December results dropped $5.5 billion (profit down 94%) due to lower commodity prices, while it wrote down De Beers by $1.6 billion. Its shares closed 2.99% higher at R429.07.
- Spar will not ask shareholders for more capital as it battles a R10 billion debt pile. To aid with paying down the debt, it is considering various debt structuring options and has the support of its financiers. The retailer is also battling falling volumes in some markets such as South Africa. Its shares were up over 1% on Wednesday afternoon following the release of a trading statement. They have still fallen by a quarter in the past year.
- Tiger Brands shares fell the most in more than four months on Thursday after the group reported lower volumes of goods sold, while flagging a tough time ahead. The stock closed at R202.91, down 3.59%. The company said revenue for the four months to the end of January fell 1% year on year, driven by volume declines of 8%, which were offset by price inflation of 7%. Black Friday and festive season sales fell short of expectations.
- At the time of writing the rand was 2.3% weaker and the ALSI was 0.4% up for the week.
Sources: Dynasty, CNN, News24, Bloomberg, Daily Maverick, TechCentral, BusinessLIVE, NewYorkTimes, etc.
