The Budget and coronavirus

Have you ever watched a heavyweight boxer take a devastating blow to the head but not go down? That is where South Africa is right now. We need only a very light push to crash to the floor but if we find someone to hold us up, we might recover and carry on fighting. In the Budget Speech delivered by Tito Mboweni last Wednesday two positives jumped out, namely tax relief for most people and a R160 billion cut in government salaries over the next three years.

The small number of South Africans who are actually paying taxes have been systematically squeezed almost dry over the last few years and as we have said before, there will come a time when aggressive tax avoidance and fraud will make any further raising of taxes counterproductive. That time is now and SARS has admitted that the 1% VAT increase in 2019 has in fact led to a moderation in VAT collections and an increase in VAT fraud. So now we see a reversal of the strategy of tax increases and in the 2020/2021 tax year most of us will pay less tax. Soon, corporate tax will also be lowered.

When it comes to the lowering of the public services wage bill, government has finally agreed that although public servants have received above-inflation salary increases over many years, actual productivity has dropped significantly. A staggering 34% of public spending goes to the public wage bill. The only problem with this new cost-cutting initiative is that the unions have not agreed to these austerity measures and have already signalled their disapproval by declaring war on the government. So, expect to see rolling protest action and pray you will not need services from any public office soon.

At the end of the day, South Africa is spending way more than it earns (see graph below) and without creating growth and jobs, we will be downgraded to junk by Moody’s very soon, and that will be the light push that will see us crashing to the floor.

On the coronavirus issue we are staring into something we cannot quantify yet. All the world equity markets except for Australia have turned negative for the year to date. Equity markets are forward-looking and they price a share today for what they think the profits will be in the future. As it stands today, the virus has spread across most of the developed world and has just made landfall in Brazil and Algeria. The thing about the virus is not the very sad but relatively low mortality, but rather the economic consequences of everything grinding to a halt. We believe that the current fall in share prices could exponentially increase as the virus takes hold in the USA, Africa and South America.

So, holding on to your cash is not all that bad, but panic selling of equity is not a good idea because the virus will be contained and this loss will be a blip on the longer-term chart of equity performance (see graph below). The trigger for a turnaround in this dire outlook will be the discovery of a vaccine, much like the one for the ordinary flu which has lowered the annual death rate for this disease substantially. We live in hope.

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