A look back at 2016
From a South African investor’s viewpoint, probably the most extraordinary feature of last year was the appreciation of the local currency against the USD. Given the problems over the position of the Finance Minister which began in December 2015 and have rumbled on ever since, it is hard to believe that the Rand, which started out the year at R15.50 to the USD finished it at R13.70/USD – very nearly 12% appreciation. And this after it depreciated by some 30% during 2015!
With investment markets quite mixed this proved to be a significant drag on the offshore component of portfolios.
Of the events affecting markets during 2016 clearly Brexit and the advent of Donald Trump as the 45th President of the US were the most significant. The full effects of these two events are still to be felt around the globe.
Into 2017
Davos
This year’s meeting of the World Economic Forum was probably the busiest and most intense and interesting for many years.
The major issues discussed were: The future of globalisation in an era of increasing nationalism and protectionist policies; The potential global power shift and the possibility of a new world order emerging ; growing inequality.
For the first time the President of China Xi Jinping was present and astonishingly he gave an impassioned speech in favour of globalisation, free trade and openness. It was clearly aimed at the new Trump administration and also to signal China’s willingness to step into the breach not only from an economic viewpoint but also over major issues such as climate change, about which the new US administration, so far anyway, appears to be dangerously ambivalent.
Market Reaction To Trump
Whatever politicians, the media and activists might be saying, quite clearly markets have so far reacted positively to the new Trump administration’s outline, for that’s all that can be said about it so far, of its economic policies. “Making America Great Again” promises substantial domestic infra structure spend together with general reinvestment in the economy resulting in what is being called the “Trump Jump”. Mostly in anticipation of this positive outcome, equity markets particularly have reacted positively and the US Dollar has strengthened. For how long, is the big unanswered question.
South Africa
The appreciating currency last year resulted from a settling of the ructions at Treasury in late 2015. Finance Minister Pravin Gordhan was central to this and he pursued his objective of staving off a ratings downgrade in mid -2016, and later on in the year, very successfully. A developing partnership between government, business and labour provided a much needed united front in retaining South Africa’s investment grade rating. Rising commodity prices and better trade balance figures provided a boost too with a surplus of R12 billion being double what had been expected.
GDP growth in 2016 was a listless 0.50% but is expected to increase to 1.4% in 2017 and 1.8% in 2018. Whilst not out of the ratings downgrade wood yet, a more positive note towards SA has recently been sounded by agency S&P.
On the less positive side was the generally on-going weak economy, hampered by a prolonged drought and low consumer demand.
Unemployment at 27% of the workforce remains stubbornly high with youth unemployment at a shocking level of 48%.
Nevertheless, political issues aside – including an imminent cabinet re-shuffle – SA appears to be in for a better 2017 than it has experienced for a while.
The 2017 Budget
Minister Gordhan will present his budget on 22 February. Once again a fine balancing act has to be performed. The previously forecasted revenue shortfalls of R23 billion for 2016/17 and R28 billion for 2017/18 have to be met. The minister must fund for the shortfall whilst at the same time somehow providing a boost for what is still a weak economy. Higher taxation of one sort or another can be expected. However, raising corporate tax from the current 28% is likely to prove a disincentive for growth. Increasing the VAT rate seems the most obvious source; the current 14% is below the global and African average of 15%/16%. It is estimated that a 1% increase would produce an additional R15 billion in revenue. However, to raise VAT is likely to prove a non-starter politically.
Selling off superfluous and unprofitable state owned enterprises would also be an obvious source of capital. However, once again, such a move, as we have already seen, is politically divisive and therefore again a non-starter it would seem.
That leaves personal income tax and the usual sin taxes plus a new tax on sugar which has been strongly mooted recently. A rise in the personal marginal rate of tax, say by 1% or even 2%, is a distinct possibility but at 41% already, when the global average is 33%, such an increase might well serve as a disincentive.
The Davis Committee on Taxation is not due to deliver its final report until the end of this year – or at least ahead of the 2018 Budget – so the much talked about Wealth Tax is unlikely to be introduced until then, if indeed it ever is.