TWO TOUGH DECISIONS IN A WEEK

This article first appeared in the Business Times section of The Sunday Times on 20 March 2016 

LESETJA Kganyago’s announcement that the Reserve Bank’s monetary policy committee had decided to increase the repo rate by a further 25 basis points appears to have been overshadowed, perhaps rightfully so, by Deputy Minister of Finance Mcebisi Jonas’s bombshell that he resisted attempts to be “Guptarised”.

The deputy minister’s statement carried extensive economic context, including that “the current economic climate presents many risks for [the] country, which requires responsible leadership to avoid a full-blown crisis”.

He called on South Africans to “unite on the key issues relating to managing the macroeconomic risks” and said that “the extent to which we are able to navigate the current macroeconomic challenges, restore investor confidence and rapidly stimulate growth will depend on heightened levels of political leadership”.

In the context of the big reveal, it appears that the deputy minister was suggesting that the threat of state capture poses a macroeconomic risk to our country.

This risk becomes pervasive when no answers are provided to the constant rumours, innuendo and now firm allegations around one family’s personal relationship with the president.

It’s worth noting that the deputy minister’s press statement was issued by the National Treasury and not in his personal capacity.

Back in Pretoria, the Reserve Bank’s monetary policy committee was engrossed in its scheduled three-day meeting, and one would expect its six members to have had little time to pay attention to the latest instalment of Guptagate.

Before them was the unenviable task of deciding on monetary policy in a difficult economic context.

Inflation is still overheating, with the Reserve Bank expecting it to peak at 7.3% in the fourth quarter and end the year on an average 6.6%.

This is well above the 3% - 6% mandate range. However, the committee’s decision was not straightforward this time around.

The rand has staged a mini-comeback since the committee’s last meeting with a 4.5% recovery against the dollar.

The electricity tariff increase awarded to Eskom came in at 9.4% for 2016-17 as opposed to the 16.6% initially requested.

Even on the inflation front, things improved slightly, especially in relation to its long-term forecast.

At the committee’s last meeting, inflation was expected to peak at 7.8% by the fourth quarter. That number is now 7.3%.

Yes, it is still well outside the target range, but this slight improvement has led to a “within range” forecast of 5.5% in the fourth quarter of next year, giving us some much-needed light at the end of the tunnel.

All of the factors above led to three committee members favouring the 25 basis point increase we eventually got, with the other three members preferring no change.

“Ultimately the committee decided on an increase,” it said in a statement.

I am told Kganyago would have been called on to make a casting vote on the matter, given the deadlock.

So, in one week, two very big and very tough decisions were made by two leaders in the economic cluster of South Africa.

One is second-in-command at the Treasury. The other is the governor of the independent Reserve Bank.

The last time South Africans saw the two together was at the budget speech 2016-17 press briefing.

They were seated next to each other alongside Minister of Finance Pravin Gordhan and an empty seat, presumably meant for SARS commissioner Tom Moyane. The irony in all this would make for a riveting bestseller.

In any case, Guptagate will continue for months. More victims of attempted Guptarisation are likely to emerge, and perhaps those who were successfully Guptarised will come out, too.

As for you and me, the reality is that we are now paying a prime rate of 10.5% for our mortgages.

Inflation continues to undermine the purchasing power of our hard-earned income.

Perhaps we, too, could do with a ministerial post

MINISTER WE WERE WILLING TO PAY MORE

This article first appeared in the Business Times section of The Sunday Times on 28 February 2016 

THE first time I saw the budget speech on Wednesday morning, I was convinced pages were missing. I did my usual quick squiz of the document and looked for the key big-ticket items I expected.

I found nothing, other than that fiscal discipline would come from curtailing the public sector wage bill. So I read the speech again, much slower. Still nothing. I picked up the Budget Review, all 235 pages of it, and paged through it carefully. That is when I realised that none of what I thought was going to happen, actually happened.

My biggest surprise was the decision to keep the marginal tax rate constant at 41%. It is no secret that the government needs to generate more revenue. Last year, we missed our projected tax revenue by R4-billion, which widened the budget deficit further than expected.

Due to slow economic growth, the 2016-17 fiscal year is likely to be a difficult one for individuals and companies. So collecting additional taxes from individuals who are losing jobs as the commodities slump persists and companies that are reporting lower profits is going to be difficult.

There is no doubt the fiscus need much more revenue than what the minister asked for this week.

I would suggest that, ironically, most South Africans were ready to play their part in ensuring our country navigates these difficult times.

South Africans, especially the high-income earners, were ready to come to the party, and an increase in the marginal tax rate would have been appropriate. Some may wonder why I would advocate paying more tax.

It is not because I enjoy paying tax. However, I am acutely aware of the challenges facing my country, and I would not hesitate to play my part, even if it means earning less.

I think many other South Africans feel the same way.

In the Budget Review I discovered an interesting table outlining the amounts of tax expected to be paid by individuals at different levels of taxable income for the 2016-17 year.

South Africa has 13.7 million individuals registered for income tax. Some 6.6 million, or 48% of them, don’t pay any tax as they earn less than R70 000 a year. That leaves 7.1 million taxpayers. Of these, 2.6 million earn less than R150 000.

If you earn anything more than R701 301 a year, you are in the highest tax bracket and are paying 41% tax on your earnings.

According to the Treasury, there are only 429 173 people who earn more than R750 000. That is 6% of the total population of taxpayers. This group pays 47% of the tax bill.

In this group of 429 173 there is a special group. They are the 94 578 who earn more than R1.5-million a year.

This crowd couldn’t fill FNB Stadium and represent a mere 1.3% of the taxpaying population, yet pay a whopping 23.5% of taxes collected.

Finance Minister Pravin Gordhan argues that an increase in VAT is inappropriate in these tough times because of the tax’s regressive nature.

Everyone, including the poor, would have to pay more for all “VATable supplies”, although one could soften the blow by extending the list of zero-rated items.

But why then increase the general fuel levy by 30c, or 11.6%? Why would it not be a regressive tax? The fuel price not only affects those who own cars, or use public transport. It affects the prices of all goods delivered and services rendered.

So why hike the fuel levy and leave the rich largely unscathed?

My basic mathematics tells me that the fiscus could’ve raised the R9.5-billion it plans to collect from the fuel levy by increasing the marginal tax rate by a mere 0.5%.

This would affect only 429 173 people, and it’s the very rich 94 578 FNB Stadium crowd that would pay most of this increase in any case.

The increase in transfer duty for properties valued at more than R10-million and the increase in capital gains tax inclusion rates are a slap on the wrist. By the Treasury’s own admission, they would collectively raise only R2-billion for the fiscus.

In his budget speech, Gordhan repeatedly highlighted the need for all South Africans to work together to navigate these challenging times. Even rich South Africans were ready to come to the party, and the minister didn’t take the opportunity.

When I consider the reality of an economy that will see only 0.9% growth this year, the words of former finance minister Nhlanhla Nene’s keep ringing in my ears.

“If we do not achieve growth, revenue will not increase. If revenue does not increase, expenditure cannot be expanded.”

An increase in the marginal tax rate was appropriate, Minister Gordhan.

THE REST IS UP TO YOU, PRAVIN!

This article first appeared in the Business Times section of The Sunday Times on 14 February 2016 

Watching President Jacob Zuma's state of the nation address this week reminded me of my favourite orator, Winston Churchill, who was once quoted as saying: "A good speech should be like a woman's skirt: long enough to cover the subject and short enough to create interest."

True to form, the president did speak for a very long time, even if you exclude the "points of order" preamble. Unfortunately, the demonstrations by the opposition parties have become the key attractions of the annual address, and have overshadowed the actual content delivered on the day. That speaks volumes about the real state of our nation.

When the "Honourable Speaker" eventually dealt with the EFF, Zuma proceeded to deliver what I thought was a long speech that didn't cover any real detail and certainly didn't create interest - at least not the detail and interest we needed.

A key precursor of Sona 2016 was a meeting between the president and the business community. Business has felt consistently left out by the government in policy and strategy formulation, especially as it relates to economic growth and transformation. Fair assertion or not, it is clear that South African business and politics have had an acrimonious relationship characterised by an elephant-sized trust deficit.

The CEOs apparently gave the president eight specific initiatives that can help the economy recover, and many of these were practical and measurable.

On the back of this, I hoped for a state of the nation address that would give some detail on the initiatives the government is considering to help ignite the economy and avert potentially crippling rating agency downgrades.

Excitement grew when I heard the president say: "A resilient and fast-growing economy is at the heart of our radical economic transformation agenda and the National Development Plan.

"When the economy grows fast it delivers jobs. Workers earn wages and businesses make profits. The tax base expands and allows government to increase the social wage and provide education, health, social grants, housing and free basic services - faster and in a more sustainable manner."

At this point I thought the president was preparing South Africans to understand and internalise the tough economic reality we are in.

I thought he would then follow up with something like "Compatriots, the opposite is also true. Without a fast-growing economy we cannot achieve radical economic transformation in the time frames we hope to. We cannot deliver the jobs we hope for. Workers cannot earn the wages they hope for and businesses will make less profit, some even losses; and the tax base will contract, making it difficult for government to sustainably deliver services."

But that didn't happen.

Instead, Zuma tried to give us a false sense of comfort.

After highlighting the challenges faced by the domestic economy, and the risks attached thereto, including the fact that the situation requires an effective turnaround plan from us, he said: "Our country remains an attractive investment destination. It may face challenges, but its positive attributes far outweigh those challenges. We must continue to market the country as a preferred destination for investments."

It was a missed opportunity.

It would have been beneficial to categorically state that 0.7% GDP growth is not an attractive investment return. We are not in a good space. On the face of it, and for some time to come, we are not an attractive investment destination.

However, the good news is that GDP growth rates are cyclical. We won't be here forever. We need to counter this slump with actions that quickly get us back to being attractive again. We need to highlight the long-term investment prospects of our country to investors, while showing empathy for the current poor performance of our economy.

This would have displayed much-needed empathy to an investment community that has more reason to exit its South African positions than to hold. C oming from our head of state, it would have gone a long way to reassure foreign direct investment cheque signatories that, notwithstanding the current economic slump, the government of South Africa is in tune with the realities and working hard to address them.

Another missed opportunity was Eskom. This state-owned enterprise has often been on the unfair side of criticism for the way it has reacted to the "energy crisis" that had grabbed the headlines. The headlines are no more. That is no coincidence. It is the fruit of hard toil by the company and its shareholder, the government.

Yes, the president did talk about the R83-billion invested and gave a short update on Ingula power station. However, he had an opportunity to pause and remind us all about the fears that existed just a year ago, and how the government got to work, put together a plan, and executed on it and now has actual results to show for its swift action. While still a work in progress, Eskom can be a very important case study that shows our capability in times of crisis.

But all is not lost. We have one more shot at this. Over to you, Minister Pravin Gordhan.

MINISTER NEEDS TO ARM HIMSELF WITH A NERDY TOOL

This article first appeared in the Business Times section of The Sunday Times on 10 January 2016

A fascination I developed in my early days as a trainee auditor was the opportunity to finally see, in real life, all that I had spent years studying in textbooks at university.

The nerd in me developed a liking for auditing concepts and was most intrigued by the responsibility of auditors to exercise professional scepticism in carrying out their duties.

According to the US’s Public Accounting Oversight Board, the concept of “professional scepticism” refers to an attitude that includes a questioning mind and a critical assessment of evidence.

This responsibility includes obtaining sufficient appropriate evidence to determine whether there are any material misstatements, rather than merely looking for evidence that supports management ’s assertions. Of course, this is also the reason many people viewed my colleagues and I as the company ’s police brigade. To an extent, they were right.

Nonetheless, this proved auditing was no “tick and bash” exercise but a profession where a tremendous amount of judgment is required in order to formulate that ultimate opinion. This is where independent evidence is critical.

In fact, according to the South African Institute of Chartered Accountants’ journal, Accountancy SA, “calls by oversight bodies for increased auditor scepticism followed in the wake of a number of high-profile corporate failures, including the role that accounting practices played in the 2008 financial crisis”.

Unlike many auditing concepts, professional scepticism is not a technical procedure. You cannot prepare a work paper documenting that you’ve carried out your professional scepticism. It’s a frame of mind, constantly exercising a critical questioning mind. It’s watchful diligence.

I was reminded of my rather nerdy auditing concept as I considered what trait our new (but old) Finance Minister Pravin Gordhan would need as he takes on the mammoth task of managing low economic growth, rising inflation, rising interest rates and a rising fiscal deficit.

Gordhan will need bucket loads of professional scepticism.

He will have to constantly obtain sufficient appropriate evidence to determine whether there are any material misstatements, rather than merely looking for evidence that supports other people’s assertions.

Late last year, rating agencies downgraded South Africa’s credit status to one notch above “junk”, with little hope that the country will pick itself up out of slow economic growth.

Fitch downgraded the rating by one notch to BBB-, the lowest investment grade, putting it in line with the ratings of Standard & Poor’s and Moody’s. S&P went further and dropped its outlook for the country to “negative ”.

If we do slump into “junk” it means we can say goodbye to billions in foreign investment, as many asset managers of hedge funds, pension funds and the like would be unable to invest in South Africa and its companies.

These are the assertions.

What evidence is there that South Africa is likely to slump into non-investment grade? What factors determine the credit rating of a country? Are these factors so irretrievably in place that a downgrade to non-investment grade is a likelihood? What about the fiscal discipline South Africa has displayed over the years? Does that count for nothing?

Gordhan should not look for evidence that supports the assertions of these rating agencies. Instead, he should seek to demonstrate that there is empirical evidence that proves South Africa is a compelling investment destination and a solid investment destination in the long term, notwithstanding its recent slump. Nothing fundamental has shifted in South Africa’s fiscal discipline. There is no indication of any imminent shift.

Let’s take this mindset to the rating agencies.