‘Invest your money offshore and die poor’
That's the rosy-hued word from a leading economist
“Invest your money offshore and die poor.” This is the quip suggestion from Efficient Group chief economist Dawie Roodt.
Speaking at the Free Market Foundation on the latest budget and fiscal condition of South Africa, Roodt emphasises the increased offshore institutional investment limits and assures that asset managers will certainly be maxing out on them.
Roodt observes that the February 2018 budget was still very much a Zuma budget, presented by a Zuma minister. With national budgets being a three-year rolling design, there was simply no time to change the numbers. However, the medium-term October budget could be more Cyril-like.
A key concern for Roodt is the ever-ballooning state spend. “We are trying to spend ourselves rich” he critiques. “That is what wealthier developed countries can do. As an emerging market, we should rather be saving, investing and creating wealth – and we are certainly not doing this.”Roodt explains that if an economy slows, it’s fine for the state to increase spending. When the economy picks up government then needs to limit its spending and focus on debt repayment. In contrast, when the South African economy has revived, government has continued to spend, especially on civil servants, state-owned enterprises and social grants, and there are plans for even more state spending over the next several years.
“This is our biggest problem,” says Roodt. “The state is simply too big.”
There are probably more than three million civil servants in the broadest sense, and over the years they have received huge salary increases. Roodt puts the average civil servant earnings at 38% more than the private sector, when it in fact should be lower, as the private sector worker takes on more risk. Way too much of our state borrowing goes on current/consumption expenditure such as this inflated payroll, rather than on longer-term investment spending. Also, interest on state debt is the fastest growing spending item – and will soon be the biggest.
In this “awful” budget, Roodt notes the huge increase in personal income tax by stealth. He criticises government for imposing such high personal tax rates, as well as relatively high corporation tax. In emerging markets, the model should be one of lower direct taxes and higher indirect taxes. “Instead, we are behaving like a wealthy country such as Japan.”
On the VAT increase, he says this is the “least bad” thing to do, if one needs to increase tax collection.
“Parastatals” get a blast, especially Eskom with its constantly extended and increased guarantees. With its recent downgrade, Roodt reckons this will pull the sovereign rating down, and he is waiting for the death knell of Moody’s to seal junk status on our international bonds. And as if we don’t have enough ailing SOEs, Postbank is to get a banking licence and there is sure to be a bailout in this regard. And the bankrupt Road Accident Fund saga continues.The appointment of Pravin Gordhan as Public Enterprises minister sits well with Roodt, who did not rate him highly as Finance minister. On state spending as a percentage of GDP, Roodt reckons things started going wrong on Gordhan’s watch. Under Nhlanhla Nene, this ratio came down and Roodt is happy that the “technocrat” is back as finance leader. And under Gordhan, running of SOEs will improve.
On state debt as a percentage of GDP – a key indicator for ratings agencies – Roodt says it took Trevor Manuel years to bring this down. But it has since been on the up, now at around 56%, excluding parastatal guarantees.
A big ask from Roodt is that we cut back state spending by 2% in real terms annually, which is a whopping 8% in nominal terms. And he wants to see some ruthless moves coming from the new president.
Chris Gilmour is an investment analyst.