Here’s what you need to know about your finances in 2018, and one thing you absolutely should be doing.
South African consumers have had two tough years financially. But there’s no point in puzzling over what’s been; it’s the future of our country’s finances we wish we could decipher. To help us with our crystal ball gazing, we spoke to Stuart Kantor, the CEO of Kanan Wealth, for his predictions in key financial areas for 2018.
While consumers don’t like inflation because it means they end up paying more for things, a certain amount of price growth is a sign of a healthy and active economy. For this reason, the Eurozone and the USA are hoping for inflation in their economies, and according to Stuart, “If inflation goes up in those regions, it’s likely to filter through to South Africa,” he says.
So, while South Africans have been relieved that our inflation has returned to the 6% range after a massive surge in 2016, if global ambitions are achieved, we might see local inflation climbing again, which will mean we’ll have to budget carefully for our spending on food, clothes, household goods, travel and just about anything else.
While the South African interest rate is usually linked to activity in the global markets – if they go up, we go up – Stuart says that with election years coming up, it’s highly unlikely that we’ll see local increases. The current repo rate is 6.75%, and the prime lending rate is 10.25%.
This means that your savings will continue to earn the same amount of interests and your debt will continue to be paid back with the same level of interest.
However, Stuart says, “It’s still heartbreaking to see how many people are trapped in a debt cycle. For 2018, all South Africans should take a view of paying off any debt that’s not paying off a productive asset.”
He explains that productive assets are things like a house or a car, or education or even clothing that could help you to get a better job. “Spend only in areas that will help you achieve a better future, that will carry you forward.”
South Africa’s real estate scenario is currently being described as a “buyer’s market” – meaning that sellers aren’t getting the prices that they are hoping for. Stuart points out that this market is very much “location based”, although even Cape Town’s rapid property price ascension has slowed.
“However, the one trend in property is that ‘big is bad’, and there’s a trend towards smaller living areas rather than the costs of servicing larger homes. So the prices for smaller homes are climbing faster than bigger ones,” he says.
Simply put, it’s a good time to buy and a bad time to sell, but if you are thinking of investing in property, smaller is better.
Stuart says that in the equities space, asset managers are seeing more value in the mid-cap shares (the smaller companies – not in the Top 40). “Now that we’ve had a positive result in the form of Cyril Ramaphosa’s election as president of the ANC, the mid-cap sector is going to fly.”
Speak to your financial adviser about whether they are adjusting your portfolio in line with the changing political landscape in South Africa.
Stuart says, “There’s likely to be an increase in taxes, with a slight increase on wealth taxes, and the progressive tax tables being more weighted or a percentage increase on income tax. My gut feeling is that VAT is going to go up, but that it’s a very controversial position.”
Whatever happens, he says, it’s definitely going to get more onerous on taxpayers, especially now that the government has promised - and has to pay for - free tertiary education for low-income and working-class students.
While an increased wealth tax will only affect the wealthiest South Africans, a VAT increase will mean that all of us will have to face rising costs in all our goods and services.
In November last year, ratings agency Standard & Poor downgraded South Africa’s credit rating to full junk status, but Stuart is optimistic that this might be South Africa’s last downgrade. “I don’t think we’re going to get downgraded again by subsequent ratings agencies. Our politics and our democracy are proving to be robust – I’m impressed with the number of people and institutions who are fighting for our democracy.”
While South Africa’s still a long way from regaining investment-grade status, we have hopefully stopped our ratings descent. While our country’s credit rating doesn’t seem particularly relevant to the average man in the street, it does have an effect on the amount of money that government can spend on social services and infrastructure, so this turnaround would be very beneficial for us all.
Although we enjoyed a nice spike in the rand exchange rates after the Ramaphosa announcement, Stuart says that he believes the rand will remain “range bound” – which means that it will rise and fall within a specific range (Stuart believes this is R12 to R13.50), and not move dramatically beyond that unless something extraordinary happens. But good political news could keep it on positive end of that range.
This being the case, the cost of imported goods won’t increase and cause a knock-on effect in the South African marketplace. And for those South Africans who do business or travel overseas, their costs will not rise significantly.
“Unfortunately for South Africa, the oil price has bottomed out, and it’s on its way up,” says Stuart. “And since I’ve already mentioned that I believe the rand is range bound, even though it has recently gained value resulting in a petrol price decrease, I think we’re going to see increases in the fuel price in the year to come – and experience all the knock-on effects on the general economy.”
There’s a mixed bag of good and bad economic news facing South Africa in the coming months, and in our current interesting times, anything can happen. However, overall, it would seem that a modest improvement in South Africa’s fortunes and the finances of its people is on the horizon. We just need to use our opportunities wisely and, as ever, avoid the trap of over-indebtedness.