Moody’s rating next month is widely expected to be a downgrade to junk.
Consumers must avoid falling into a debt trap “like the plague” as the possible downgrade of South Africa’s credit rating by Moody’s next month could undermine the December petrol decrease and the recent Reserve Bank repo rate reduction, experts said.
Efficient Group’s chief economist Dawie Roodt said despite the 25-basis point reduction in the repo rate by the Reserve Bank, it was highly likely ratings agency Moody’s would downgrade SA’s sovereign rating to junk status in February. Roodt said with much of the downgrade already priced in by the market, it would nonetheless send a negative message to the foreign investor community. “That message is that SA does not have an effective plan to turn around the economy and that things are going from bad to worse,” he said.
43% of consumers spend 50% of income on debt, according to an in-house Debt Rescue survey.
Roodt said other factors that would play a role in determining SA’s position included the fuel price and load shedding. Load shedding has been a bone of contention among senior officials in the ANC. The crisis resulted in the resignation of Eskom board chair Jabu Mabuza and calls for Minister of Public Enterprises Pravin Gordhan to step down. Following a special meeting of the ANC national executive committee (NEC) at the weekend, President Cyril Ramaphosa ignored the calls and the NEC did not entertain them. This was seen as a victory for the president, who is using Gordhan as a guard against corruption and state capture.
Respected economist Mike Schussler said Eskom’s load shedding would be a major impediment to economic growth this year. “It all depends on Eskom -whatever happens, we are going to have a big fall in the economy in South Africa. I don’t know how big, but it all depends on load shedding,” Schussler said.
Roodt highlighted other factors, including the effect of the much-anticipated downgrade. He said that the fuel price would remain stable in February, with perhaps a small increase in the price of diesel, which would help to mitigate the blow. The overall outlook remained dismal, with Eskom showing no sign of an imminent turnaround under its new chief executive officer and SAA hovering on the brink of bankruptcy. it is a common cause [the SA Revenue Service] is not meeting expectations in collecting taxes to cover the state’s budget,” he said. “So, a number of options, including increased taxes, an increase in the VAT rate and all manner of rates and levies, to bail the government out of the crisis it created for itself are likely to be announced in the budget speech in February. ” Matters that would impact negatively on dismal economic growth rate and fuel rising un-employment included Sars’ continued poor tax collection, which could mean bad news in Minister of Finance Tito Mboweni’s budget. Consumer economist and chief executive officer of Debt Rescue Neil Roets said consumers should brace for even tougher times.
He cautioned that consumers should prioritise reducing debt levels and avoid new debt. “We are in trouble and no-where is there even a glimmer of hope on the horizon,” Roets said. “Numerous corporates, including Telkom and the mining industry, are planning substantial lay-offs. Deeply indebted consumers are in trouble with nowhere to turn for relief other than to try and settle their debts over a period of time by going under debt review. “Eskom’s debt, alone, is enough to cause the government serious problems, let alone its outstanding debts of more than R2 trillion that have to be repaid. Any plans Ramaphosa and Gordhan may have had to cut jobs in the civil service have been shot down by the unions.” A recent Debt Rescue in-house survey found 24.8% of consumers had piled up debt to pay day-to-day expenses. A huge 43% spent 50% or more of monthly income on debt.
Durban – Economists have painted a bleak picture for 2020 and have warned South Africans to tighten their belts and to brace themselves for an increase in taxes.
While people have started the new year by expressing their hopes and aspirations for the new decade, a number of economists believe that 2020 is going to be another tough financial year, as the economy in South Africa continues to underperform.
Speaking to The Mercury yesterday, three top economists Dawie Roodt, Azar Jammine and Mike Schüssler were almost certain that South Africans could expect an increase in taxes.
While they were still uncertain whether Finance Minister Tito Mboweni would announce another increase in VAT, the economists agreed that fuel levies, sin taxes and possibly personal income tax would be increased.
Roodt, the chief economist at the Efficient Group, predicted that another “painful” year was in store for the country, adding that he was disappointed in President Cyril Ramaphosa who “seems to be a follower and not a leader”.
“He seems to be waiting for everyone else to tell him what to do. For us to see a positive change in our economy, there needs to be stronger political leadership.
“The state needs to become more efficient with its spending and decision-making,” he said.
Roodt said an increase in VAT would result in an uproar from trade unions and ordinary citizens, while an increase in personal income tax would see the wealthy acting out by emigrating.
“And it will be unwise to increase company tax because that will be unproductive in attracting investment to the country.”
Roodt said the silver lining could come from the South African Reserve Bank if it could cut interest rates.
Jammine, the chief economist for Econometrix, said he believed the government would be forced to hike taxes because of the rise in the country’s budget deficit.
However, he said lately evidence had suggested that the already increased tax rates were proving to be more counter-productive.
“There’s a danger in raising taxes, as the country ends up with less than anticipated.
“Theoretically, increasing VAT would be the most effective, but the unemployed and poorer folk will feel penalised,” Jammine said.
He estimated that a further 1% increase in VAT would bring in about R25billion, “but that decision would be unpopular and there would be a tremendous reaction from the unions”.
“This year is absolutely going to be another difficult year, especially for smaller businesses that are getting into deeper trouble as the economy languishes,” Jammine said.
Schüssler, chief economist at Economists.co.za, said the government desperately needed to look at cutting down on its expenditure.
“We’re in for a tough time, but the biggest problem is government’s overspending,” he said.
Neil Roets, chief executive of debt counselling company Debt Rescue, also predicted a tougher year for consumers, saying that “nothing has changed economically”.
He said that many consumers were also starting off the year on the back foot after having overspent during the end-of-year holidays.
He said that many went through the festive season without a budget and were then left scrambling in January.
“The trick is to always have a separate budget for December. December is unlike other months.
“But for those who didn’t work with a budget and have found themselves in a tight space, it’s never too late to draw up a budget for this month and work with what you have,” Roets said.
He suggested consumers make provisions for further price increases through the year and include an emergency fund.
“If you’re over-indebted, don’t hesitate to call a debt counsellor.
“They have been extremely successful in helping people pay off their debt without losing their assets,” Roets said.
The other factor that South Africa will have to grapple with is the possibility of Moody’s downgrading the country’s economy to junk status.
S&P Global and Fitch moved South Africa’s debt to sub-investment level in 2017, when the country was embroiled in corruption scandals.
Last November Moody’s revised the outlook on the country’s investment-grade credit rating to “negative”.
At that time, Moody’s said the outlook revision on its “Baa3 ”rating – the lowest rung of investment grade – was motivated by a deterioration in the economic growth outlook and rising debt.
The UK’s Financial Times, in its predictions for this year, said it forecast that South Africa’s economy would be downgraded to junk status by Moody’s.
The Financial Times said Mboweni would have a tough time to convince the ratings agency that the economic situation could be turned around.
Economist Dawie Roodt says that the state of government’s finances means that further tax increases can be expected in 2020.
Roodt noted in an interview with eNCA that the state’s debt is at record levels, meaning “there will be tax hikes”.
“The question is which one of the taxes will be increased? I am pretty sure that things like the fuel levy will be increased, and sin taxes.”
The economist said that the two taxes that can make a difference to the country’s finances are personal income tax, and value-added tax (VAT) and that February’s Budget will reveal all.
“I think personally personal income tax will be increased,” Roodt said.
Roodt said that a positive indicator going into the new year, is the strength of the rand, trading at around R14.00 against the dollar on Thursday (2 January).
A stronger rand, he said, is an indication that foreigners are interested in investing in South Africa, especially in financial markets.
He added that a stronger rand could also lead to interest rate cuts, which would benefit under pressure consumers.
Roodt’s comments align with Treasury’s revenue concerns which it outlined in its medium-term budget policy statement released at the end of October.
“Significant tax increases over the past several years leave only moderate scope to boost tax revenue at this time,” the Treasury said.
However, despite this limited scope, Treasury said that additional tax measures are under consideration to raise an extra R10 billion in fiscal 2021 – but did not provide any further details.
“Given the fiscal position we find ourselves in, all tax options need to be on the table,” said Chris Axelson, chief director for economic tax analysis in the Treasury.”
Will an interest rate decrease make a difference?
Weekend Prime states that the SA Reserve Bank’s monetary policy committee has reduced the repo rate from 6.5% to 6.25%. The repo prime rate is the benchmark interest rate at which the Reserve Bank lends money to other banks. Therefore the prime interest rate has decreased to 9.75% – this is the prime rate banks charge their lenders.
Neil Roets discusses how it will bring a bit of relief to consumers. However, this may not be significant enough to bring relief to consumers who faced a lot of financial challenges in 2019.
With the economy shrinking, unemployment at an all-time high and yet another downgrade almost certainly waiting for us in January from ratings agency Moody’s, Roodt warned of the likelihood of a recession.
“I am fearful that we are heading towards a full-blown recession and in fact may already be in one in the fourth quarter.
“Given the devastation wrought by load shedding and the government’s rapidly growing debt burden, I cannot help but to think that things are going to get a lot worse before they get better,” Roodt said.
He said that with the fiscal deficit at an all-time high, it will make it increasingly difficult for the government to borrow money abroad to keep the economy going.
Neil Roets, chief executive officer of debt counselling company, Debt Rescue, said they were gearing up for one of the busiest periods in January, February and March in the history of the company.
“We see more new clients seeking help with the repayment of their outstanding debt in January and February than during any other months of the year because of additional debts that had been stacked up during the holiday season.
“Parents suddenly realise that they have to pay school fees that had not been budgeted for and with credit cards maxed out on luxuries in November and December many have no choice other than to seek relief by going under debt review to prevent debt collectors from seizing their property.”
“With gross consumer debt at around R1.8-trillion and the government’s gross loan debt at R2.2 trillion in 2016/17 financial year, it is clear that South Africans are in for a very rough ride,” Roets said.
He said almost half of all consumers were three months or more behind in their payments. The major culprits are credit and store cards followed closely by unsecured debt.
Price increases are affecting the middle class
According to Debt Rescue’s CEO, Neil Roets, a bleak year is predicted for consumers. The country’s middle class is getting poorer due to interest rate and petrol price increases – and other increases. Unfortunately, salaries aren’t rising in line with all the price increases. This is leaving consumers with less buying power. Middle class can potentially get pushed into poverty due to too much pressure. Although the increases affect the rich too – at least they can afford it.
There has been an increase in people taking out debt. South Africa doesn’t have a saving culture. This is because people aren’t taught how to deal with money and therefore they become targets for credit providers out there. Find out more by listening to Neil’s radio interview with SAFM.
Economists are saying nothing is going to change come 2020
Neil Roets believes 2020 will not be different from the years that preceded it. Salaries have not gone up with all the price increases in fuel, food, etc.
People spent a lot of money over Black Friday and Christmas – a lot of people even spent money they don’t have and are starting 2020 on a back foot.
Neil Roets warns customers to only use reputable debt counsellors to ensure that they get all the help that they need to get out of debt. Find out more by listening to the radio interview.