In this episode, Warren Ingram discusses the finance minister’s strategy of using the country’s emergency savings within the context of the Budget Speech. He evaluates the potential consequences of this decision and provides insights into navigating the complex financial landscape of South Africa. This guide aims to equip both experienced investors and newcomers with the knowledge needed for effective financial planning in uncertain economic times.
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Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
In this episode, Warren Ingram discusses the finance minister’s strategy of using the country’s emergency savings within the context of the Budget Speech. He evaluates the potential consequences of this decision and provides insights into navigating the complex financial landscape of South Africa. This guide aims to equip both experienced investors and newcomers with the knowledge needed for effective financial planning in uncertain economic times.
Questions/topics uncovered:
For more valuable insights from the 10x team, click here.
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Welcome to Honest Money. We're doing a special budget edition this week. I always think we don't really do a lot of time sensitive stuff in Honest Money because we want you to learn the principles of how you manage your money and discuss what's important for the long term. But I do think when we're talking about budgets, especially national budgets, they can have a huge impact on how we manage our money from time to time, and I know a lot of you are interested in whether the budget's good or bad or what you should be doing around your money. So maybe just as a starting point, I think it's not a bad budget. I think where we are now if we have to relate this to someone in personal finance, this is a situation where someone's income is going down, their debts are creeping up and they don't have a lot of great options in terms of what to do with the next year or two, and so there's more demands on the budget. There's more demands on expenses than there are money coming in. There is money coming in. So, in that context, if you look at what the finance minister has done, he went and raided one of our last remaining piggy banks, which is this foreign exchange reserves, and I'm not going to get into the detail of it. It doesn't really matter. But just to know that since 2006, south Africa has been buying foreign exchange and some gold as a way of stabilizing the financial position of the country, and it's a very good thing to do.
Speaker 1:The economists were really bleak with us, I remember in the early 2000s when we had no foreign exchange reserves. So building up those foreign exchange reserves has been a very good idea. But what's happened since then is that we were buying dollars, for example, in 2006, probably at about six grand 50 to the dollar, and as of today, it's probably around 19 grand to the dollar. So that profit that we've made on the dollars that we own is sitting in our balance sheet as a country and the Reserve Bank's been holding on to that money on our behalf as a country. And so what the national treasury have done is they've said well, that's actually the asset of the country. It's not the balance sheet of the Reserve Bank but of a technical thing, but it's an important difference. And so the, although the Reserve Bank manages those foreign exchange reserves, the assets belong to national treasury and therefore to the country as a whole. So what what national treasury have done is they've said you know, out of that 500 billion Rand worth of profit that you've made on those foreign exchange, we're going to take 150 billion of that and we're going to put it back into the South African economy and the bulk of it we're going to use to settle debt. So so I think it's a good call. It's a bit like saying you know, you've got in a big emergency fund. It's maybe got a bit bigger than you thought it would, and what you've done now is reduced your emergency fund and settled some credit cards, personal loans, overdraft. So that's what the country's done. So it's a good idea, but it's not a position of strength.
Speaker 1:We're not managing here from positive choices. We're making the best of the bad choices that we have to make as a country. So that's probably the big talking point from the budget. For the rest, what's happened is that they haven't given us an adjustment in the inflation bands when they're calculating our taxes. So, for example, every year they would usually change the tax budgets, where the first amount that you pay tax on would shift up slightly, and that would adjust for everybody and that would allow us to pay the same amount of tax in real terms, in other words, adjusting for inflation, but this time around they haven't adjusted for inflation, so all of us are actually paying a little bit more tax. That's really the effect of what's happened. Even though tax rates haven't gone up, we're, in terms of the buying power of our money, we're now spending a bit more of our money on tax than we did last year, and that's again we're in a situation where we're making the best out of bad choices that we can.
Speaker 1:If there is one positive, I think it's that they're forecasting that the economy will grow slightly more than what it did in the past, and that's a very nice position to be in, where your economy is growing, but more than you anticipated. But having said that, the economy needs to grow about 5 or 6% a year for us to start absorbing people who are unemployed into the economy. At the moment, they're shifting the forecast growth from 1% to 1.8% and that's unfortunately not going to help with unemployment. So unemployment has increased again, and that's really bad. I think the youth unemployment is now at about 60% of the youth are unemployed in South Africa, and that's really not a good situation to be in. So I think, in terms of budget, no big fireworks, no big scary news, no big increases in tax on dividends or capital gains or something which would be investor unfriendly, but at the same time, we're sitting in a situation where the country is really struggling to make some good, sensible, long-term choices.
Speaker 1:I think, if I have to give you a comment on this, I think it was the best we could hope for. I think that they were scrambling to find a way to settle some of our debt, and debt is important in our country because debt at the moment was forecast to go to 77% of the economy. So just to explain that, debt to GDP the GDP of the country is kind of what we generate as revenue every year, and they were forecasting that our debt would be about 77% of our GDP, which is a frightening number when you're a small economy like ours, but now, using those foreign exchange reserves, that looks like it will cap out at about 75%. It seems like a small move, but it's a massive signal to foreign investors and to local investors that the Treasury are serious about limiting our costs and trying to get to the point where, at least in a year, we spend less than what we earn, and that's an important thing. We all know honest money. We've been saying it for years make sure that you don't spend more than you earn every single month, and our country's been doing that for quite some time now, and so I think, from that perspective, it's a good sign for everybody, for everybody, that the Treasury is taking the expenditure very seriously.
Speaker 1:What's a bit worrying is that they keep committing to limiting the salaries that they will pay civil servants, and then every year they're breaching those commitments. So you know whether it's the Minister of Public Works are not sure who it is but the government's not really able to hold the line in terms of limiting how much we pay our civil servants, and we all know we've got a deeply unproductive civil service, and, and so you know, paying more to get more unproductive services from your government just doesn't make sense, and let's hope that they start to take action. You know to kind of rectify that, but the big thing here is we need the economy to grow. You know, at the moment when you're fighting around about, you know how to make a little bit more money every year or save a little bit of tax or pay down a little bit of debt. The reality is we should be growing the economy enormously, and if I listen to the economists that I respect, it seems like, you know, between Scom's problems with load shedding and with transnet issues, that's costing us about three, potentially 4% a year of economic growth, and that's three or 4% is what we need to make the economy grow fast enough to start absorbing unemployed people in our country, and so just those two things need to be fixed as rapidly as possible, and surely you can't fix Scom overnight and you can't fix transnet overnight. But what you can do is send the signal to say we know we've got problems, we know we need to get out the way and let the private sector get involved in fixing and then managing those assets on an ongoing basis, and so I hope that's what happens, you know.
Speaker 1:I think we need to stop spending time and effort on ideology as a country and focus much more on the main thing, and in our country the main thing is we need to solve unemployment, we need to allow the economy to grow, and the only people that can really do that are business. Business are the main employers of people around the world, and so we need to make sure that our politicians and everybody else understand that's what's required is help business to employ more people and then worry about everything else thereafter. And unfortunately, at the moment I think that there's a lot going on with our government where they're trying to kind of detract attention from bad economic performance by focusing on global issues and the like, and I think that that's just harming our reputation as a country where we're focusing on the wrong things. So I'm sorry that it's not a super positive budget, but at the same time I think it's the best budget we could have hoped for in the circumstance. What I really hope is that we start to see more and more good news around energy coming into the system, whether that's private energy being produced for private consumers, including business, or more bid windows opening where the country gets more power at a national level. That's a really critical thing. And then we need to see more and more reforms around escom sorry Transnet kicking in, where we see the ports performance getting better and we see rail line performances improving. Those are the two big issues for this year that we should be focusing on, and the budget didn't do much around that.
Speaker 1:One small thing that's personally very exciting is that they've started to allocate money and started to provide incentives for electronic vehicle manufacture in South Africa. So the motor manufacturing sector is pretty much the only big industrial sector we've got left. That's not related to mining, and they've been telling the government for three or four years that we need you to work with us to shift our manufacturing focus from internal combustion engines to electronic vehicles whether those are batteries, hybrids or hydrogen, it doesn't matter. But we need as an industry, we need those signals from you as a government and as a country. Otherwise we need to move our manufacturing elsewhere. So it took the trade and industry minister far too long and it was far too slow to get anything going, but at least now we see in the budget that they're moving in the right direction to allow the motor manufacturing industry to plan their next generation of vehicles.
Speaker 1:And it's important because that's one of our big export industries of high value, value-added goods. In other words, we're not just digging stuff out of the ground, putting them in the ship and sending it out of the country. We're digging stuff out of the ground, making cars from it and then exporting fully finished cars, and that's a huge source of revenue for the country. It's a huge source of employment and it supports many other industries. When you look at battery manufacturers, parts manufacturers and the like. That, for me, was one positive signal. Unfortunately too slow, as usual, but something good to focus on. So, for the rest, my one comment there is we should be very careful when we're investing that we're too focused on national budgets or political events.
Speaker 1:If you were sitting on the sidelines waiting for the budget before making an investment decision, the reality is that whatever happened in the budget didn't really move markets at all. The RAND strengthened very slightly, so everyone was quite excited that the market had enjoyed what had gone on around the budget. But soon thereafter the RAND fell a lot and it had nothing to do with the budget. It had nothing to do with South Africa. It was about international events where investors see that interest rates are going to stay high in America for long.
Speaker 1:So whatever you can predict about what's going on in South Africa, be careful that you don't focus so much on one thing where you realize that actually something else is a much bigger factor and then just draws all the money that you could have made in one direction away from you. So don't predict, don't make forecasts on your investment decisions. Stick to a long-term strategy and read the budget with interest, but not as a market moving event. Thanks so much for your questions and please keep sending them through. We love to get your questions so that we can help provide the information that you want for your personal finances. Thanks so much.