This is a fundamental question for our country. In our view it comes down to one issue. Whether government is brave enough to take the steps necessary to reduce public spending and realign it to what we can actually afford!
Through the last few months, the private sector has taken all the pain. Employees have been retrenched or placed on short time and many sectors have faced severe hardship. In the public sector however there has been little or no reduction in employment or pay. In most cases public sector employees are working reduced hours, but still drawing a full salary.
This is not sustainable as SARS has already announced a material reduction in tax recoveries driven by a combination of lower profitability, lower collections from VAT and Income Tax. The public accounts need to be adjusted to reflect the lower income.
The only solution for government is to reduce the public sector wage bill. This however is not easy given the close political relationship with COSATU and the already strained relationships in this area politically. It is also not in the ANC’s DNA, nor President Ramaphosa’s for that matter, to have direct confrontations, so don’t expect any fanfare, headlines or Thatcheresque “drawing of lines”.
Instead we predict the usual political rhetoric with government kicking the can down the road without making any fundamental changes.
At some point this will translate into a weakening exchange rate (worse than where we are now) as international investors lose confidence in the ability of South Africa to meet its obligations. Assuming the Reserve Bank acts as it has in the past then they will raise interest rates in response to any inflation (which would be likely if the exchange rate deteriorates and imports become more expensive). Higher interest rates would place more pressure on the economy and already stretched households.
So, while we can hope for the best, it is important in our view to plan for the worst and try and build businesses to weather the difficult times ahead. Some things to think about as you do:
- How can we diversify our earnings to help reduce risk and particularly increase offshore earnings?
- How can we reduce our cash flow exposure to government/public sector (as the pressure increases third party suppliers are likely to feel the pain in order for public sector bodies to pay wages)?
- How can we make our business more flexible and able to react quickly to changing events?