Category: Finance

by Louis Nel

Bitcoin and cryptocurrencies have come a long way. From starting out as funny internet money in 2008 to gradually capturing mainstream media attention. Suddenly even my ageing mother wants to know how to buy bitcoin. This is not without its drawbacks, as governments and regulators who wanted nothing to do with crypto also want in on the hype.

In November 2020 the Financial Sector Conduct Authority (FSCA) issued a draft regulation to classify crypto assets like bitcoin as a financial product.

This means that crypto companies will have to be registered as financial service providers (FSPs) just like traditional financial service providers. This will include a whole host of products and services like exchanges, ATMs, raising business capital, investment funds, wallet apps and crypto custody companies. Where cryptocurrency itself is hard to regulate, companies are easier.

According to the FSCA, the consumer should be able to make informed decisions about companies that they choose to deal with. Recently, Mirror Trading International (MTI) made headlines about its run-ins with the FSCA. The company took bitcoin deposits on behalf of investors and promised returns of up to 10% per month. In the aftermath of MTI, the FSCA wants to make it harder for companies like this to exist in the vacuum between legislation and the rapidly advancing field of fintech.

News headlines often paint crypto as the preferred choice of criminals. in reality, the US dollar and the traditional banking system is still very much used. South Africa is part of the Financial Action Task Force (FATF), the global watchdog against money laundering and terrorist financing. Our local legislation needs to be aligned with these international guidelines.

Regulation also forces companies to do proper due diligence on their customers, keep records of the origins of their funds and log all transactions. Where the borders of countries are blurred with crypto, this legislation will seek to carve out digital borders.

Bitcoin’s reason for existing rests on the failed policies of central banks. Existing outside of the traditional financial system is what gives bitcoin power. It is also the biggest obstacle to mass adoption and protection of consumers against scams. Since bitcoin is backed by nothing, it is a free market that decides its value. It is also decentralised so that no government can shut it down or ban it. In this Wild West of financial freedom, there is also ample scope for scammers to set up shop.

Brandon Topham, an executive at the FSCA says it best. “Regulation must be as minimal as possible to protect the public without hindering the market. Ignoring the issue is worse than over-regulating. We need to find the right balance.”

The Financial Sector Conduct Authority (FSCA) last week issued a ”draft declaration” that will bring crypto assets such as bitcoin under its regulatory watch. The public has until 28 January 2021 to comment.

The burgeoning crypto market has been largely unregulated until now, though purchasing crypto assets does fall under several other laws, notably exchange control, Pension Funds Act (limiting the amount of “alternative assets” that may be held in a pension fund) and the Collective Investment Schemes Act.

What was missing from this arsenal of regulation is what to do about crypto assets, which have the potential to evade regulatory authorities worldwide. As economist Dawie Roodt points out in a Moneyweb Crypto podcast, “private monies” such as bitcoin are easy to hide from authorities and this means they can also be hidden from tax agencies. That potentially poses an existential threat to governments and nation states everywhere.

Regulations such as those proposed by the FSCA rely on public honesty. Crypto exchanges such as Luno and VALR are largely supportive of regulation where these provide better protection for consumers and help week out the many scams proliferating around bitcoin.

Authorities and crypto industry players have been debating for years how to define and regulate this market.

With bitcoin now sailing back towards its 2017 peak of about $20,000, it’s become clear that some form of regulation was on its way.

The draft declaration by the FSCA means crypto assets such as bitcoin and Ethereum will henceforth be classified as financial products under the Financial Advisory and Intermediary Services (Fais) Act.

Crypto operators must now give unbiased advice

This means that anyone giving advice or acting as an intermediary – such as a crypto exchange – would have to register as a financial services provider and comply with the requirements of the Fais Act.

One of the key aims of the FSCA declaration is to emphasise the high risks of investing in crypto assets, and intermediaries involved in this market -0 such as crypto exchanges – will have to do proper risk assessments and give unbiased information when advising clients.

Virtually all exchanges, anticipating that such rules were on the way, long ago implemented Know Your Customer (KYC) and Anti-Money Laundering (AML) rules (as required by the Financial Intelligence Centre Act, or FICA). This means you have to prove where your funds originated before investing in crypto assets.

What the FSCA draft declaration also means is that crypto exchanges and other crypto intermediaries will henceforth be licensed as financial services providers. The licensing and reporting requirements will allow authorities to build a richer database of information around this emerging asset class.

Crypto scam detection

Crypto intermediaries have been broadly supportive of regulation since it brings credibility to this emerging asset class and will help snuff out scams (of which there re many). A general rule of thumb for scam detection is don’t answer a too-good-to-be-true invitation that comes to you via WhatsApp.

The Intergovernmental Fintech Working Group, involving government, regulators and industry players, published a position paper in May 2020 to develop a regulatory framework for crypto assets, focusing on areas such as:

• The implementation of an anti-money laundering and counter-terrorism financing regime,
• A licensing and supervisory regime from a conduct of business perspective, and
• A regulatory regime for the monitoring of cross-border financial flows.

But…there are a few problem areas

The FAIS Act imposes strict rules on how intermediaries market to clients, and the manner in which advice is given. Also covered under this Act is how client data is stored.

Responsible exchanges have invested large amounts of money in securing the crypto assets of clients using “cold storage” (disconnected from the internet) and multi-person authorisations (to prevent any one or two people in an exchange legging it with your crypto – which is, after all, nothing more than information in bits and bytes). These are the type of security questions you would need to ask an exchange before investing with them.

Farzam Ehsani, co-founder of crypto exchange VALR, notes that the FSCA declaration is not one of the 30 recommendations in the Position Paper on Crypto Assets that was published by the regulators in April 2020.

“Furthermore, all of the products in the FAIS Act have a central issuer and crypto assets such as bitcoin do not. Gold, for instance, is not classified as a financial product under the FAIS Act. We look forward to engaging fully with the FSCA during the comment period to ensure a fair, relevant and appropriate regulatory position for the benefit of all South Africans.”

Rocelo Lopes of crypto company Stratum says there are some benefits to the FSCA proposed regulation in that it would allow customers to weed out bad actors in the crypto space by establishing a hierarchy of credibility around responsible players, but the FSCA needs to take great care how it stores and secures the information it proposes gathering so as not to expose clients’ crypto portfolios to hacking or other intrusions.

“The FSCA would need to realise the enormous responsibility that comes with this appointed task and know that the crypto industry leaders will be keeping a close watch as it all unfolds,” says Lopes.

It is clear from the FSCA statement that this is the first of several regulatory steps affecting crypto assets that we can expect going forward.

What’s your view?  Is regulating crypto assets a good thing?

The EFF has introduced the South African Reserve Bank Amendment Bill which seeks effectively to nationalise the SA Reserve Bank (SARB) by removing private ownership of shares in SARB and vesting these with the state.

The EFF bill has the explicit aim of expropriating the shares of 802 private shareholders, who include finance minister Tito Mboweni (10,000 shares), DA shadow finance minister Hill Lewis, the Anton Rupert Trust, Discovery, Absa, Nedcor, FirstRand Bank and Nedcor.

These shares would be expropriated without compensation and vested in the state on behalf of 57 million South Africans. “For true sovereignty and autonomy, the SA Reserve Bank must be transferred to the state,” says the EFF in a Parliamentary presentation. “The next debate will be on its mandate.”

While it would cost billions of rands to nationalise the Reserve Bank, the EFF sees a more expedient solution as the expropriation of private shareholders. The share capital of the Reserve Bank is set at R20 million, and the dividend per share at R1,000. Hence, the party says the financial loss to shareholders is limited.

Parliament’s Standing Committee on Finance and Select Committee was given a briefing on the proposed bill on 25 August 2020, when the DA questioned its constitutionality, particularly Section 25 which prohibits arbitrary deprivation of property. At the presentation to Parliament, the EFF’s Floyd Shivambu said the majority of the Reserve Bank’s existing shareholders were white and non-South African citizens, and that the aim of the proposed amendments was to protect the Bank from the abuse suffered by many state-owned companies.

Parliament’s legal services unit has also raised concerns over the constitutionality of the proposed amendments. The law as it stands – underpinned by Constitutional Court findings – require expropriation to be accompanied by compensation. Adv Noluthando Mpikashe, the Parliamentary Legal Advisor, told the Standing Committee that the law is vague as to what is considered just and equitable compensation, and that the EFF bill may not pass constitutional muster.

The EFF bill seeks to give the minister of finance powers to regulate the appointment of directors to the SARB, and to further regulate the tenure of these directors and how they are to be appointed.

The bill further proposes allowing the minister of finance to appoint the SARB auditors.

The EFF bill proposes amending several sections of the South African Reserve Bank Act of 1989:

Section 4 of the SARB Act, particularly that section which allows shareholders to elect directors. The EFF wants the minister of finance to perform this function.

Section 4A, which requires the SARB to submit annual financial statements to shareholders (as well as the minister of finance and Parliament). The EFF wants this section amended to exclude private shareholders.

Sections 5, 6 and 9, which deal with the appointment of directors, their tenure and conditions of appointment. The EFF wants the state to step into the shoes of the private shareholders when it comes to directorial issues. Section 9 deals with the validity of board decisions. The current SARB Act deems board decisions invalid only when there are insufficient board members or when a disqualified person sits on the board. The current Act requires shareholders to elect seven directors from candidates confirmed by a panel, though the Act also allows any member of the public to nominate directors for selection. It is uncertain whether the EFF wants this function to be performed by the state, or whether SA citizens should be allowed to continue nominating their preferred directors.

The EFF wants Section 10, which deals with the powers of the SARB, to be amended to remove its power to “form shares” for issue to private owners, as these will henceforth be owned by the state.

Section 13 of the SARB outlines certain prohibited businesses, such as the purchase of its own shares, or the purchase of shares in a bank (without the minister of finance’s approval). The bill seeks to remove these prohibitions, which would allow the Reserve Bank to purchase it own shares, buy shares in a bank, would remove limitations on the SARB’s ability to purchase government bonds from Treasury.

Section 21 of the Act sets the share capital of the Reserve Bank at two million ordinary shares of R1 each. The Bank is allowed to increase its capital with board approval. The EFF proposal would make the state the owner of these shares.

Section 30 authorises the appointment of two firms of public accountants by shareholders to act as auditors of the Bank. The bill proposes vesting this authority with the state.

At a recent presentation, the EFF outlined the motivation behind the proposed amendments: “The South African Reserve Bank as one of the apex of the financial system in the country should be democratically owned by the people as a whole as a necessary and important building block towards complete overhaul of the currently white-owned financial sectors.

“A state owned SARB must pursue decisive transformation of the financial sector in a manner that will change its current dominance of descendants of colonial settlers.”

What’s your opinion on the EFF’s South African Reserve Bank Amendment Bill? Is it time to place ownership of the bank in state hands? Or would this open the door to the possibility of state meddling in the economic life of the country?

You can feel the public anger

By Ciaran Ryan

Gaye Davis – EWN

The Disaster Management Tax Relief and Tax Administration Bills were passed without any parties objecting and will now go before the National Council of Provinces (NCOP) for concurrence.

The National Assembly has approved two COVID-19 tax relief bills.

The Disaster Management Tax Relief and Tax Administration Bills were passed without any parties objecting and will now go before the National Council of Provinces (NCOP) for concurrence.

The bills were tabled by Finance Minister Tito Mboweni with the emergency budget in June and provide for tax relief measures to help businesses, households and individuals deal with the economic impact of the pandemic and the lockdown.

Finance Minister Tito Mboweni commended lawmakers for swiftly dealing with the COVID-19 relief tax bills.

“The tax bills are never straightforward and to consider them under tight deadlines, through a new communications medium, makes it even more challenging, but I think you have risen to the challenge.”

Mboweni said that the crisis made it necessary to use the tax system to provide relief and support the economy as a whole.

Opposition parties, including the Democratic Alliance (DA) and the Freedom Front Plus said that while they supported the bills, they believed that the relief offered was not enough to get the economy moving again.

The bills provide for, among other things, the deferred payment of taxes, a skills development levy payment holiday and increasing the tax-deductible amount of donations to the Solidarity Fund from 10% to 20%. The relief window’s been extended by two months and will apply until the end of September.

OPINION/EDITORIALS – FinancialMail

Thanks to the state’s handling of the lockdown, ours has become a country where the risk of rebellion has never been higher since democracy

South Africans — illicit cigarette smugglers, the ANC Women’s League and a smattering of EFF populists aside — may have been united in their delight at moving to a less restrictive level 2 lockdown this week, but that’s probably where the sense of national unity ends.

One of the harshest lockdowns in the world may have helped avoid a ghastly crush on hospitals, but it has left traumatic financial and social scars — and a country divided like never before.

It has birthed an unhealthy sense of us and them: ordinary South Africans versus rapacious political elites. This was illuminated starkly at the funeral of ANC stalwart Andrew Mlangeni, where not only did the politicians casually break their own rules on the number of participants at a funeral, but soldiers were photographed smoking — at a time when cigarettes were banned.

The response was predictable. When the Daily Sun interviewed people at a vibrant social gathering in the middle of the Joburg CBD afterwards, with alcohol in plentiful supply, they deemed it an act of rebellion against government hypocrisy. As one participant said: “They tell us to observe Covid-19 regulations and ban tobacco and alcohol sales, yet they smoke, drink and gather at funerals with more than 50 people.”

Thanks to the state’s handling of the lockdown, ours has become a country where the risk of rebellion has never been higher since democracy.

Last week, nonprofit Sakeliga released the finding of a new poll, in which 95% of respondents said the lockdown had reduced their willingness to pay tax. Six of 10 respondents said they’d even consider illegally withholding tax if it could end the lockdown quicker.

The social compact is precarious. As former SA Revenue Service executive Telita Snyckers wrote in the FM this week, the lockdown has given South Africans a “taste for insurgency — the danger of a tax revolt has never been greater”.

It means, says Sakeliga CEO Piet le Roux, that businesses are becoming “unusually motivated to decrease their tax payments”.

Le Roux’s argument — based on the poll — is that the corruption, mismanagement and harmful policies that accompanied the lockdown have created a “perfect storm” for tax morality in SA.

And it’s not just among individuals or small businesses. Le Roux says a senior executive at an “iconic” local company “considers paying tax in SA a possible violation of the American Foreign Corrupt Practices Act, since the money largely funds harm, mismanagement and corruption. While this interpretation is probably, legally speaking, incorrect, it is morally striking.”

It’s not hard to see why so many in the private sector — unlike public officials who suffered few salary reductions or job losses — feel so bitter. This is clear from the 61% of businesses that told Sakeliga they’d suffered big financial losses through the lockdown.

Now, the pandemic was always going to hurt incomes. But the way the state handled the lockdown — implementing rules without consultation, refusing to explain its decisions, and failing to crack down on corruption in its ranks — left a bitter taste.

Treating SA’s citizens — corporate and private — with such disdain, when they’re the ones who pay civil servants’ salaries, is a recipe for disaster. It’s not acceptable to keep the country in the dark over the science behind frightening Covid mortality models, nor to close ranks against tax-paying businesses when you’re likely to need their support now more than ever.

It’s unclear whether President Cyril Ramaphosa can mend this rift — but if he wants a shot at finding the money SA needs to survive, he’ll have to prioritise such a reconciliation.

Moneyweb [Barbara Curson] 

In the preamble to the latest Tax Administration Bill, the South African Revenue Service (Sars) indicates that it proposes to “remove the requirement of intent from certain criminal offences”.

In what has become Sars’s attempt at a “tough stance” to scare taxpayers into compliance, it has taken a blunt tool to remove a higher burden of proof that an action – or an omission – had criminal intent.
Sars has already decided that any action or omission was “wilfully done”, and is therefore criminal. So why should it waste time in trying to determine this?

It seems that in Sars’s book, taxpayers cannot make an honest error (naturally this doesn’t apply to Sars’s own staff).

Bowmans partner Patricia Williams explains: “Sars wants to remove the requirement that the relevant action must have been done ‘wilfully’. This removes the requirement of criminal intent before the action is considered a crime.”

Burden of evidence

Sars has in the past attempted to “utilise the criminal offence provisions to extract funds from people”. However, to be successful, Sars had to clear the ‘wilful intent’ hurdle. This was obviously placing too high a degree of skilfulness on Sars’s auditors; after all, ‘wilful intent’ requires a heavier burden of evidence.

Says Williams: “Criminal intent already encompasses dolus eventualis – that is, foreseeing the reasonable possibility of an outcome and reconciling yourself to that. In the circumstances, gross negligence would already arguably meet the standard of something ‘wilfully’ done. What Sars is seeking to do is to criminalise mistakes.”

Many frustrated taxpayers and tax practitioners complain that Sars treats them like criminals. Well, here is the proof.
Sars intends excising ‘wilful intent’ from:

• Paragraph 30 (employees’ tax offences) of the Fourth Schedule to the Income Tax Act (TAA);
• Section 58 (offences in regard to compliance) of the Value-Added Tax Act; and
• Section 234 of the Tax Administration Act.

The amendment to Section 234 of the TAA now changes an error that can be made by anyone into a criminal act, such as: the failure to notify Sars of a postal address, a physical address, banking particulars used for transactions with Sars, an electronic address used for communication with Sars, or such other details as the commissioner may require by public notice.

It is also apparent that Sars expects all taxpayers to read their public notices, even those without access to the internet or newspapers.

Further, Section 234 provides that Sars may register and allocate a taxpayer reference number to a person who is not registered. Woe betide the person who doesn’t know this, as not using this number in any communication with Sars will turn you into a criminal.

In the Draft Memorandum on the objects of the Tax Administration Laws Amendment Bill, Sars reasons that using the term “wilfully” in respect of a statutory crime is not correct, and that it is not possible to “wilfully” neglect something, and that failing to do something required by the Act could be “problematic”.

Intent

Williams is of the view that: “This is patently wrong. One can purposefully fail to submit one’s tax return, or purposefully fail to pay one’s taxes. This looks like Sars is misstating the position, in order to make the proposed [unfair] amendment seem more reasonable.”

The National Prosecuting Authority (NPA) is of the view “that the current wording relating to criminal offences substantially undermines the ability of Sars to ensure compliance based on the objective standard expected of the reasonable person”.

“Consequently,” it says, “this may hamper the criminal prosecution of non-compliant taxpayers by the NPA in seeking to prove the elements of the crime.”

Williams is surprised: “Since when is it justifiable to remove certain elements of a crime in order to make it easier to prosecute?”

Is it possible that the NPA, which cannot point to a successful record in making powerful criminals account for their crimes, realises that it is not competent to pull off an ‘Al Capone’ tax arrest without removing ‘wilful intent’?

As for Sars, do its problems stem from the term ‘wilful intent’ scuppering its attempts at prosecuting the big boys – or from its lack of skills, inefficiency, and having been hollowed out by state capture?

One of the ironies of the times in which we live is that taxes on cigarettes and alcohol are to go up – even though there isn’t a hope in hell of government collecting any of this while there is a ban on cigarette and alcohol sales.

Proposed changes to tax laws have just been announced, making good on finance minister Tito Mboweni’s 2020 Budget promise to raise “sin” taxes on cigarettes and alcohol.

In his February Budget speech, Mboweni said a 340ml can of beer or cider would increase by 8c, and a 750ml bottle of wine would increase by 14c.

Excise on a box of 20 cigarettes would go up an extra 74c. Last week, government tabled the proposed changes to tax laws and rates, and invited public comment. Now might be a good time to make your voice heard.

Mboweni may not have known in February that a lockdown was coming and the tax collection projections he was banking on from cigarettes (and alcohol) would go up in smoke.

Then came the lockdown. Despite the ban on cigarette sales, 90% of smokers continuing to get their daily fix from their “dealers”. An estimated 11 million South African smokers have been criminalised, and Tax Justice SA (TJSA) estimates the loss to the fiscus of R5 billion so far. The loss is running at R35 million a day.

“The 132-day-old ban is causing untold misery for millions, robbing the fiscus of R35 million daily and destroying thousands of jobs,” says TJSA founder Yusuf Abramjee, after hearing court evidence led by cigarette manufacturer BAT against the government ban.

“Anyone who had to sit through two days of repetition, rambling and long-winded explanation by Minister Dlamini-Zuma’s lawyers will know how weak her case is,” says Abramjee. “Sadly for the three judges, they have a duty to consider the huge volumes of paperwork with which the Minister has tried to overwhelm them.

“But the President should not wait for their verdict, as patently the ban is so wrong and is doing so much harm. He should do the right thing and lift this failed prohibition immediately.

President Cyril Ramaphosa has promised to crack down on officials who break the law to profit from the pandemic after stories started emerging of politically-connected individuals scoring massive Covid-related supply contracts. Meanwhile, rumours abound of politically-connected suspects raking in profits from illegal cigarette sales.

Whether true or not, the tobacco industry in SA has been gutted, taken over by black market operators. SA Revenue Services (Sars) had spent the last decade trying to clean up the tax-dodging in this sector. It’s been set back at least a decade by the ban. The black market operators will not easily be dislodged, even when the ban is eventually lifted.

Many South African companies face unprecedented dangers amid the coronavirus crisis, with the economic impact of the lockdown on an already contracting economy.

In these circumstances it is vital for any company to plan their tax affairs carefully.

Hence the focus by Cova Advisory on new Carbon Tax details, which have only recently been published by the Treasury.

Understanding them is challenging, not least because there is not yet total clarity on all aspects of the regulations and how to claim each and every allowance.

However, failing to examine, to assess and then to act will mean that company executives are neglecting an opportunity to make savings – especially on a tax some corporates are resistant to pay in the first place.

A concern with the Carbon Tax is the way in which information and legislation has dribbled out, in a frustratingly unpredictable way after the tax has been implemented. It is vital that all the rules around the carbon tax are clear so that companies can plan to reduce their carbon footprint and thereby reduce their carbon tax liability. The fundamental purpose of the tax is to change behaviour, and by implication, a business will want to pay as little as possible.

We attempted to tackle this in a recent webinar, which looked at some of the allowances under the Carbon Tax Act, and the ways to reduce your carbon tax liability.  Some of the main messages are summarised below.

For anyone who is not familiar with the structure of the Carbon Tax Act, the tax is levied on the direct emissions of a company over a calendar year.

The act was signed into law on May 23, 2019, and became effective on June 1, 2019. The design of the tax includes a number of tax-free allowances, which effectively reduce the amounts which need to be paid over to the fiscus.

Regulations have been published for these tax-free allowances. Most recently, the regulations for trade-exposed sectors were published. In addition, we now have the regulation for the allowance if a company is able to emit lower emissions than others in their sector.

We almost have a complete picture, but one more part of the Carbon Tax that is crucial for claiming the allowances is yet to be launched – and that is the carbon offsets administration system and its associated guidelines.

So, what is new?

We now have a better idea of what it means for a company to be considered as trade-exposed, and how it must go about claiming the allowance.

Companies that are trade-exposed are those which face competition from products that are imported or exported. Companies that manufacture products locally and are subject to the Carbon Tax may become less competitive if the same products are being imported and are not subject to a Carbon Tax. For this reason, the National Treasury included a tax-free allowance of up to 10% for these companies.

There is a sector-based approach, where the trade intensity index of each industry sectors is defined, and the allowances are allocated using a sliding-scale approach.  However, there are provisions for companies which operate in more than one sector.

The approach seems logical, but there are still some uncertainties that exist with the determination of company-specific trade-exposure allowances, relating to the type of import, export and production data to be used. In addition, there isn’t clarity on auditing requirements.

Further calculation and analysis will also be needed by a company when it comes to claiming an allowance under the Performance Benchmark Regulations.

The regulations include a set of greenhouse gas intensity benchmarks for certain sectors, and the better a company performs against these benchmarks in containing its emissions, the higher the allowance – which is capped at 5%.

However, it isn’t always clear how these benchmarks are calculated as the methodologies will need to be requested, the measurement and verification requirements of the regulations are not defined, and some sectors have been left out.

In addition to all of this, there are further areas to explore in reducing your Carbon Tax burden.

There is a Renewable Energy Premium credit which will reduce the Carbon Tax for entities which generate electricity from green technology, such as wind and solar. Details of the rates for each renewable energy type have now been published and will be updated annually.

Finally, companies must consider the carbon offset allowance for firms that have undertaken a carbon-offset project – that is a project which results in emission reductions and which has been registered under an accredited standard.

The administrative rules on this are incomplete – as we still await a carbon offset administration system to create a South African based registry for carbon credits. It is the system that will be used to transfer carbon credits from an international registry into South African Carbon Credits which can then be used as a carbon offset allowance to reduce your Carbon Tax liability.

To conclude, then, companies need to ensure that as a starting point to manage their Carbon Tax liability, they need to quantify their gross tax liability and then fully understand which allowances are worth pursuing.

There are still some gaps and uncertainties in the Carbon Tax legislation – but one thing which is certain is that it can make financial sense to invest time and effort to get the most out of the trade exposure, performance benchmark and carbon offset allowances.

Zelda Burchell is manager at Cova Advisory.

Budget depicts havoc virus has wreaked on South Africa’s economy

By Mike Cohen, Prinesha Naidoo and Amogelang Mbatha [Biz News]

(Bloomberg) — South African Finance Minister Tito Mboweni delivered a grim assessment of the nation’s finances in a special adjustment budget that forecast a deep recession and plunging tax revenue.

Gross domestic product is forecast to shrink 7.2% this year, the most in almost nine decades, and the consolidated budget deficit is expected to surge to 15.7%. While gross debt-to-GDP is to peak at 87.4% in four years, investors were cheered by a pledge to cut spending and bring borrowing under control.

“We have accumulated far too much debt; this downturn will add more,” Mboweni said Wednesday in a speech to lawmakers in Cape Town. “Our Herculean task is to stabilize debt.”

Yields on benchmark 10-year government bonds fell as much as 16 basis points to a two-week low. The rand weakened as Mboweni spoke, before erasing most of the decline.

 

South Africa was already mired in recession and contending with power shortages when the coronavirus pandemic struck. Turnaround efforts were upended when the government imposed a stringent lockdown in late March to try slow the disease’s spread. While some restrictions have since been eased, many businesses have gone bust and widespread job losses are set to worsen a 30.1% unemployment rate.

“The debt level for our sized economy are now at an unsustainable level,” said Isaac Matshego, an economist at Nedbank Group Ltd. “We’ve been there for a couple of years, but now we have really entered red territory. Once we have passed this shock of Covid-19 pandemic, government will really have to show even greater commitment to revising economic growth and reducing its very high level of debt.”

The government cut its revenue projection for the current fiscal year to 1.12 trillion rand ($64.6 billion), from 1.43 trillion rand it estimated in February. An additional 40 billion rand in tax will be raised over the next four years, while spending will be cut by 230 billion rand over the next two years to contain debt. Details will be announced in the 2021 budget speech.

The government intends borrowing $7 billion from international financial institutions, including $4.2 billion from the International Monetary Fund. The lender and the Treasury are in protracted negotiations and “it’s critical that nothing is done to undermine the national sovereignty” in these talks, Mboweni told reporters after the budget speech.

Some members of the ruling party and labor groups initially opposed plans to approach multi-lateral lenders for help, saying the conditions attached to that could threaten the country’s sovereignty. ANC leadership supports these requests for support and IMF staff will make a submission about South Africa’s funding early in July, Mboweni said.

The government has already secured a $1 billion loan from the New Development Bank and Mboweni said the World Bank support is likely to follow approval of the IMF funding.

Peter Attard Montalto, head of capital markets research at advisory service Intellidex, doesn’t see the Treasury’s goal of stabilizing debt by the 2024 fiscal year as credible.

“You can’t just decide to do these things, you have to take the decisions to achieve that, and this will not be possible,” he said.

The supplementary budget redirected money to programs aimed at containing the fallout from the pandemic, with the health department given an extra 21.5 billion rand to build field hospitals and hire more staff, and 12.6 billion rand to other entities involved in tackling the disease. It also provides 40.9 billion rand to support vulnerable households for six months, 20 billion rand to shore up municipal finances and 12.5 billion rand to education.

The Congress of South African Trade Unions, the country’s largest labor group and a member of the ruling coalition, said it was “extremely disheartened and disillusioned” by the budget, which was unfit for a country with mass unemployment.

“We are now in danger of entering an economic depression and the scariest thing is that government does not have a plan,” it said in a statement. “This budget only served to remind us that as workers we are on our own and the policy makers have no idea what they are doing.”

What Bloomberg’s Economist Says

“We think the Treasury’s overall outlook is too optimistic, especially the ambitious plans to cut the deficit. By consolidating too soon and too aggressively, the Treasury will undermine the economic recovery and increase the risk of a future debt crisis.”

–Boingotlo Gasealahwe, Africa economist