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MTBPS underlines importance for consumers of sticking to a financial plan

Published Nov 13, 2021


New Finance Minister Enoch Godongwana faced a challenging task with his maiden budget speech – the Middle Term Budget Policy Statement – on Thursday. He walked a delicate line between balancing government’s fiscal consolidation commitments with the pressure to support South Africa’s pandemic-hit populace with more welfare spending. As expected, debt also dominated the discourse. The minister is making tough decisions. Now’s the time for South Africans to follow suit, says Farzana Botha, segment solutions manager at Sanlam Savings.

Generally, there is a feeling of optimism, with the economy expected to grow by 5.1%, from a 6.4% contraction in 2020. The growth of the local economy is forecast to average 1.7% over the next three years. The minister commended South Africans for their remarkable resilience and courage during these challenging times. When faced with difficulty, it’s critical to acknowledge our strength, and our ability to stick together to ride the storm.

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Many were worried that the commodities windfall that boosted tax revenue would be treated as permanent, prompting government to increase its spending. Minister Godongwana reassured South Africans that he’s committed to continuing efforts to curb expenditure and up efficiencies, with a single-minded mission to turn the country’s debt spiral around.

He said: “The consolidated budget deficit is expected to be 7.8% of GDP in 2021/22, gradually lowering to 4.9% in 2024/25. Notably, however, precious metal prices have started to soften. This means the revenue gains from the commodity price rally are expected to be temporary. Therefore, we should be careful about our spending commitments. We should not make permanent spending commitments from short-term revenue benefits.”

The minister played hard ball, demonstrating his ability to make difficult decisions during crunch time. He said “we cannot do everything we want at the same time”, indicating that is pivotal to prioritise.

Botha says: “There’s something in Minister Godongwana’s example for us all to emulate right now. When things seem dire, it’s time to go back to the drawing board. Double down on what’s working, get granular with what needs to change. Now’s the time to reprioritise one’s finances, set clear goals and come up with a smart, sustainable financial plan for the future.”

Regarding South Africa’s debt, Minister Godongwana said interest payments account for 21c of every rand of revenue – more than the government spends on health, social development and policing. He added that South Africa’s debt service costs are non-discretionary – in other words, we cannot avoid paying them. They therefore crowd out other spending priorities.

Botha says individual South Africans face a similar dilemma. South Africa’s debt-to-income ratio stood at 77% in 2020, indicating a steady rise in consumer debt. The difficulty, therefore, is finding ways to pay down debt while managing to save. Many have struggled with this over the last two years.

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Sanlam’s recent Letters to My Pre-Covid-19 Self campaign attests to this. In a poignant survey, 52% of polled participants said they with their pre-pandemic selves had avoided debt. 63% said they wish they’d saved consistently. And 49% said they wished they’d contributed regularly to an emergency fund.

Botha suggests a “snowball” approach: “When it comes to debt, start now. Consider ways to pay off the smallest debts first. That frees up funds to pay off the next smallest debt and save – and so on. It’s about creating virtuous cycles and celebrating small wins. These snowball into big wins, with patience and perseverance. No situation is hopeless. The sooner you start, the sooner you take back control.”

Given the tax revenue boost, the revision of GDP numbers, and a swifter economic recovery than forecast, Minister Godongwana said South Africa is in a stronger position than was feared in February. The positive GDP outlook is good news for South Africans as it should catalyse greater economic activity, which generates more money for individuals and businesses, creating a virtuous cycle.

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“When money is available – perhaps from a short-term windfall such as South Africa is currently experiencing – it’s tempting to spend it. In the case of the country, this would cause the debt situation to further deteriorate. Individuals could face a similar situation. It’s crucial to ‘pay yourself first’ in these moments. Take away the temptation by quickly moving money to savings and investments and take advantage of low interest rates. It is encouraging to see SA’s national savings rate increase to 18% in the first quarter of 2021, despite the tough economic conditions,” says Botha.

However, it’s clear the minister has no intention of complacency. Botha says: “In times of optimism and unexpected windfall, it’s even more important to be mindful of money. These are the moments where it may be possible to save more, pay off debts, and contribute to an emergency fund. Covid-19 has shown the critical role an emergency fund plays when curveballs come. It’s vital to build this ‘rainy day nest egg’ when times are good, to support your future self when circumstances change.”

Botha says: “Right now, we can see Minister Godongwana is continuing Mboweni’s prudent policies that were intended to create an enabling environment for business growth and create jobs. He also seems to be taking a tough stance on the fiscus-draining State-owned Enterprises. Now is the time for big decisions that’ll set South Africa up for accelerated growth and recovery.

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“Similarly, we urge South Africans to take stock of their finances. Saving small amounts smartly can make a massive difference over time. Reprioritise your finances and consider ways to cut costs. Then see if you can redirect these savings into vehicles for growth. Make your money work harder for you!”