As usual, Ecsponent Financial Services provided a market overview on Die Groot Ontbyt. Watch the full interview with Floris Slabbert below.


Market overview 13 February 2017

The rand is maintaining its strength, despite the nation waiting to see what the future holds for president Zuma.


Since December, our currency performed best against the dollar compared to a basket of sixteen other currencies. This surge has partially been brought about by the Ramaphosa-honeymoon period and the market’s expectation that president Zuma will vacate his office.


Another contributing factor to the strengthening rand is the attractiveness of local bonds. Backed by a strengthening currency, appealing inflation-adjusted yields and the expectation of Zexit, South African bonds have become attractive to investors, which contributes to a stronger rand.


However, the JSE’s low trade volumes of around R23 billion indicates that the market remains hesitant amid the local leadership uncertainty and unstable global markets. Both the Dow Jones and NASDAQ indices slumped after hitting record heights in January 2018. However, since last Thursday, the Dow has recovered more than a quarter of the 2,756 points it lost between the peak on January 26. Monday’s recovery has put the Dow just slightly negative for the year and the Nasdaq up 1.1% in 2018.


Ecsponent’s preference shares remain unaffected by the local and international market volatility, by paying regular dividends at a fixed rate. This investment is also tax-friendly as its returns are not subject to income tax but to dividend tax.


Funding the tax deficit

On the topic of tax, there is a lot of pressure on Treasury to fund the ever-growing deficit in tax revenue, rising public sector wage bill and special projects like free education. Revenue shortfalls are projected at R50.8 billion in 2017/18, R69.3 billion in 2018/19 and R89.4 billion in 2019/20. These projections exclude the costs associated with free tertiary education.


In terms of revenue sources, personal income tax accounts for 38% of revenue, with value-added tax making up 25%. Companies tax accounts for 18%, followed by the fuel levy (6%), customs (4%), other sources (4%), excise duties (3%) and dividend withholding tax (2%). The biggest portion of the budget goes to the public wage bill (36%) and social grants (17%).



What option will the Minister choose?

Personal income tax (PIT) remains the largest contributor to fiscal revenue. However, in 2016/2017, it was estimated that approximately 1.7 million taxpayers contribute 78% of all income tax collected. It is unlikely that the Minister will rely on PIT to fund the deficit as further increases could realistically result in a tax revolt.


The Laffer Curve below (source: PwC) illustrates the relationship between tax rates and tax revenue. It shows that rising tax rates lead to increased tax revenue, but if rates are raised beyond a certain level, revenue falls. Putting more pressure on this small group of PIT payers by increasing taxes to increase fiscal revenue could have the opposite effect, with taxpayers looking for ways to evade their tax responsibilities. Especially since the tax rate for top earners was increased to 45% last year and PIT grew by 9.4% for the 2016/2017 fiscal year.


Laffer curve

Source: PwC



Increasing corporate tax could deter economic growth and lead to further growth in the unemployment rate.


South Africa’s VAT rate has remained unchanged at 14% since 1993. A VAT rate increase of two basis points could, according to some economists, almost fund the entire R50 billion tax revenue shortfall. But it will also increase the cost of living for all South Africans. It will have a profound impact on all South Africans – the poor and working class in particular. Trade unions, notably Cosatu and the SACP, have been quite vocal about their resistance to VAT increases.


Another proposal that could raise as much as R18 billion, is adding VAT to the cost of fuel. While such a move will not raise the required funds, it will have significant ramifications for the economy. The increase will most probably be passed on to consumers, leading to rising prices across the board.


Your investments and tax

In terms of tax on investments, Ecsponent does not foresee an increase in dividend withholding tax after last year’s hike. However, capital gains tax (CGT) might come under the spotlight. Although it won’t raise significant amounts of revenue, the CGT inclusion rate for individuals, companies and trusts could increase in 2018 as a form of a wealth tax. The CGT inclusion rate for individuals increased from 33.3% to 40% in 2016. For companies, the rate rose from 66.6% to 80%.


While we continue to wait for the outcome of Zexit, investors have no choice but to brace for impact. The prevailing uncertainty is not expected to end soon. For investors, the only antidote is to make investment decisions based on a sound strategy and not on emotion.