Tag: financial crisis

South Africa is in deep financial trouble

Source: MyBroadband

The South African government is spending nearly R50-billion a month more than what it collects in taxes – and the situation is getting worse.

This is the warning from economist Mike Schussler, who said rapidly-increasing government debt is creating a “very, very deep hole”.

Speaking to eNCA, Schussler said the government’s budget reveals that the country is heading to a deficit of between R60 billion and R65 billion per month.

“This means we are spending R2 billion per day more than what we get in income from taxes,” he said.

Schussler said that while COVID-19 and the lockdown has aggravated the situation, the country was already running at a big deficit before the pandemic hit.

The projected deficit for this year was expected to be around R325 billion, but the pandemic has pushed this up to between R710 billion and R800-billion.

The higher deficit is a result of lower tax collection – which is expected to be down by around R313 billion – and higher spending on grants, hospitals, and other COVID-19 related matters.

Schussler said the lower tax collections are also partly a result of the cigarette and alcohol ban, people driving less, people losing their jobs, and lower consumer spending.

Filling the hole
The combination of lower tax collections and higher government spending is resulting in a big debt burden for South Africa.

To fill this hole, the government has to borrow money – which comes at a higher cost because of the country’s recent credit rating downgrades.

“Because of the downgrades our debt is becoming more and more expensive,” said Schussler.

An IMF loan of around R70 billion covers 10% of the expected deficit, which comes at a low interest rate.

This gives the country some breathing room, but big spending cuts and tax increases are still required to make up this deficit.

Even with the loans from the New Development Bank and African Development Bank, the country will still have to raise a lot more money to cover the growing deficit.

“We will have to go back to the IMF, we will have to look at our pension funds, and we most likely have to enter the international markets again,” said Schussler.

“We are in very, very deep financial trouble in the next few years. It is a very difficult hole to get out of.”

The chart below, published by Schussler, shows the government’s monthly budget deficit in recent years.

Global stock market turmoil: What’s going on?

Stock markets around the world are falling, driven by fears coming out of the U.S. Major indexes in New York, Tokyo and London have suffered steep losses. And a key gauge of investors’ fear spiked to its highest level in more than two years.

Analysts are trying to figure out if it’s a short-term correction for markets that had recently hit record highs or a sign of deeper concerns.

Here’s what you need to know:

What’s happening?

Markets in Asia and Europe are falling Tuesday. Japan’s Nikkei plunged 4.7%, Hong Kong stocks plummeted 5.1% and London’s FTSE 100 was down nearly 2%.

Those drops follow a harrowing day for investors on Monday in the U.S., where the Dow plummeted 1,175 points, or 4.6%. It was the index’s biggest ever point decline in a single day.

Tuesday looks set to be another tough trading session on Wall Street. Dow futures were swinging wildly ahead of the open.

Why is it happening?

There are a bunch of concerns fuelling the selling. One is the worry that the U.S. Federal Reserve will raise interest rates faster than previously expected. That was triggered by U.S. jobs data on Friday that showed wage growth is picking up – which could mean faster inflation.

When interest rates rise sharply, stocks often fall. Higher rates can eat into corporate profits. Rising rates and inflation can also cause problems in bond markets.

Experts have warned repeatedly in recent months that both stock and bond markets were getting too hot. And some analysts say the current losses could even be a good thing.

“This correction is a healthy development for the markets in the long run, and the equity bull market, while bloodied, is not broken,” Scott Minerd, global chief investment officer at Guggenheim Partners, wrote in a research note on Monday.

Why are U.S. issues affecting global markets?

The U.S. is the world’s largest economy and home to the biggest financial markets on the planet. The dollar is the currency of reference for investors around the world. What happens on Wall Street almost inevitably ripples around the globe. Markets in other global financial centres, like London and Tokyo, are particularly sensitive to it. But more closed systems, like China, are often less heavily affected. Stocks in Shanghai are down 2.2% since Thursday compared with 8% in Tokyo.

How worried should you be?

It depends who you ask. But assuming the current stock market declines are a short-term drop rather than a sign of deeper problems, financial experts generally say you shouldn’t panic.

Even if stocks continue to decline over the next few days, market corrections are normal, Greg McBride, Bankrate.com’s chief financial analyst, said.

The U.S. and other major economies are growing healthily at the moment.

“I caution investors to really be patient here and look for opportunities and not to panic,” Ross Gerber, CEO of Gerber Kawasaki Wealth and Investment Management, said on CNN. “It’s really not a time to be worried about the long-term prospects of the market.”

What does this have to do with Trump?

The plunging stock market is awkward for President Trump. He’s frequently taken credit for the big run-up in U.S. share prices during his presidency.

“It’s a risky game to talk about the markets. But it seems like Trump is going to live or die by the stock market,” said Greg Valliere, chief global strategist at Horizon Investments.

The White House said in a statement that Trump was focused on “our long-term economic fundamentals, which remain exceptionally strong.” The statement cited strengthening economic growth, low unemployment and increasing wages for workers.

But some of Trump’s policies also feed into the concerns weighing stocks at the moment.

The recent huge tax cuts for businesses were initially cheered by investors. But they also prescribed expensive medicine to an already healthy U.S. economy. Trading has always been a confusing subject for many people and you can talk to MBoxWave and fous4 if you have any questions regarding the same.

Stimulating a strong economy could be too much of a good thing. Morgan Stanley warned in the fall that “overheating” the economy may backfire by causing stocks to “boom then bust.”

And the current stresses in the bond market reflect the concerns that the U.S. Treasury needs to take on more debt to pay for the tax cuts.

By Jethro Mullen. Matt Egan, Sherisse Pham, David Goldman and Kathryn Vasel for CNN

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