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Uncertainty is about the only stable principle in the upcoming budget

Uncertainty is about the only stable principle in the upcoming budget

The Minister of Finance has to go before his peers to deliver a budget against a background of uncertainty as we have never had since Independence. This is not an easy task, and knowing the minister’s historical approach, the new budget will probably contain a number of safeguards despite a demand for higher spending in an election year.

Although the minister and his economic planners must have a fairly good idea what calendar year 2018 returned, he brings a budget to the table even before the final quarter figures are known. These are expected only in the first week of April. Much less does he have an inkling of what fourth quarter fiscal (first quarter calendar 2019) will produce, but with its small army of analysts and planners, I do not doubt that the ministry has a reasonable grip on what the broader economy is doing.

There are a small number of key values in the budget that will immediately lift the veil on the ministry’s expectations from 01 April 2019 to 31 March 2020. There will also be some further pointers in the Medium Term Expenditure Framework but these are too vague, at this point, to be meaningful over the next twelve months.

As always, calculating Gross Domestic Product, will be the biggest give-away. Except for nominal spending, all other derivatives depend on the assumptions that underlie the growth estimate for the economy as a whole. This, essentially, is the fundamental calculation that determines a whole host of ratios with an impact way beyond its mere academic value.

If the minister applies a 4.5% nominal growth rate as he did from 2016 to 2017, we know we are in for trouble. That figure does not even cover inflation. Consequently, I think the GDP escalation will be substantially above this very conservative limit.

If the assumed growth rate is pencilled in at 7.5%, the signal is one of stagnation. That is the rate used last year for the 2018/19 budget. With the jury still out on calendar 2018 growth, it will be a few more months before we actually get a preliminary indication of how true the 7.5% expectation was.

Another pointer will be the 2019 growth rate, as it was viewed twelve months ago when the current budget was tabled. At 8.7% growth, 2018 to 2019, it reflected the optimism that 2018 would have been a growth year, even if marginally so.

Perhaps the most revealling aspect, will be the actual GDP estimate itself. Again, going by last year’s expectations, 2019 were to be the year where GDP crossed the N$200 billion mark. For many people who do not have the inclination to go and work out percentages, or to split hairs over a percentage point up or down, the actual value itself is the easiest way to put the rest of the figures in perspective.

There were very few adjustments over the past year that can be used as tentative benchmarks. The 2018 mid-year review, which in the past served as a realignment of the main budget, was in that regard somewhat of a disappointment. It only served to shuffle funding around from the back pocket to the front, taking away from development, to paper over the government insatiable need to service its exorbitant wagebill.

One empirical piece of evidence, offered by the minister himself, was when he indicated that revenue collection was about 2% ahead of schedule. Of course, this does not automatically indicate that total revenue collection will exceed 2018 estimates by 2% but it does provide a sort-of indication that total revenue will be incrementally more than the budget estimates of last year.

It is important to remember that at this stage, there is a significant gap between 2018 estimates as put together by the Bank of Namibia, the Ministry of Finance and the International Monetary Fund. Current estimates range from anything between 1.2% GDP growth (BoN) to 1.8% (IMF).

This may look like small, insignificant deviations, but they are not. The differences between these estimates are expressed as percentage points to make the semantic distinction between faster and slower growth. As actual percentages of percentages, the real differences are much higher. Ask any statistics student.

From the Medium Term Expenditure Framework, we will get a glimpse of the ministry’s future thinking. Last year, the assumed growth from 2019 to 2010 was 9.2%, a level which is doubtful that it will be achieved.

All in all, as usual, dozens if not a hundred or more people will ask me what I think. Just going by the published figures (12 months old), the disappointing results of 2018, and the need to reactivate the economy, especially at consumer level, nominal growth of 6.5% is a safe estimate. This accommodates, more or less, the IMF forward view plus about 5% for inflation. If the GDP estimates reveal a 7.5% escalation, then the minister has some positive news which he has not shared yet with the rest of us. If, however, GDP growth, especially in the last two years of the Medium Term Expenditure Framework, rests on assumptions of around 8.5%, then the budget process will be in dangerous territory, resting on a very weak and unstable planning framework.

As a comparison, during the lofty 18% nominal growth days of 2013, 2014 and 2015, GDP was then projected to exceed N$254 billion in 2018. It never happened.

All the other values in the budget are to a certain extent academic. What the government Debt to GDP ratio is, is interesting but it does little for the economy other than providing the ratings agencies certain benchmarks to apply their own matrices. I am not saying that government debt is insignificant, but I am clearly stating that what we do with the money is ten times more important. As long as the overall expenditure remains within certain limits, and as long as the direct cost of debt servicing is still in view of the 10% benchmark, we are relatively safe, even more so in an African context. If the budget is applied in such a way that economic growth is tangible, the debt load can always be adjusted in future budgets.

But if the budget’s design leads to another stagnant year, then the debt load as a ratio, becomes bigger. Unfortunately, this is one of those existential paradoxes that is part and parcel of a national budget. To grow, investments must be made, but to invest, money must be borrowed. If the investments lead to growth faster than the rate of borrowing, the debt ratio comes down. No problemo.

If not? Well, I do not know. We will only see next week.

Oh, and by the way, the ITAS e-Service portal which was supposed to go live on 17 January, is still not active. Businesses still have to send a person to hand in the tax returns on the due dates. I wish I could relay some of the comments of the people in the queues here, but I can’t. None of them are very polite.


 

About The Author

Sanlam 2018 Annual Results

7 March 2019

 

Sanlam’s 2018 annual results provides testimony to its resilience amid challenging operating conditions and negative investment markets

Sanlam today announced its operational results for the 12 months ended 31 December 2018. The Group made significant progress in strategic execution during 2018. This included the acquisition of the remaining 53% stake in SAHAM Finances, the largest transaction concluded in the Group’s 100-year history, and the approval by Sanlam shareholders of a package of Broad-based Black Economic Empowerment (B-BBEE) transactions that will position the Group well for accelerated growth in its South African home market.

Operational results for 2018 included 14% growth in the value of new life insurance business (VNB) on a consistent economic basis and more than R2 billion in positive experience variances, testimony to Sanlam’s resilience in difficult times.

The Group relies on its federal operating model and diversified profile in dealing with the challenging operating environment, negative investment markets and volatile currencies. Management continues to focus on growing existing operations and extracting value from recent corporate transactions to drive enhanced future growth.

The negative investment market returns and higher interest rates in a number of markets where the Group operates had a negative impact on growth in operating earnings and some other key performance indicators. This was aggravated by weak economic growth in South Africa and Namibia and internal currency devaluations in Angola, Nigeria and Zimbabwe.

Substantial growth in Santam’s operating earnings (net result from financial services) and satisfactory growth by Sanlam Emerging Markets (SEM) and Sanlam Corporate offset softer contributions from Sanlam Personal Finance (SPF) and Sanlam Investment Group (SIG).

Key features of the 2018 annual results include:

Net result from financial services increased by 4% compared to the same period in 2017;

Net value of new covered business up 8% to R2 billion (up 14% on a consistent economic basis);

Net fund inflows of R42 billion compared to R37 billion in 2017;

Adjusted Return on Group Equity Value per share of 19.4% exceeded the target of 13.0%; and

Dividend per share of 312 cents, up 8%.

Sanlam Group Chief Executive Officer, Mr Ian Kirk said: “We are satisfied with our performance in a challenging operating environment. We will continue to focus on managing operations prudently and diligently executing on our strategy to deliver sustainable value to all our stakeholders. The integration of SAHAM Finances is progressing well. In addition, Sanlam shareholders approved the package of B-BBEE transactions, including an equity raising, at the extraordinary general meeting held on 12 December 2018. Our plan to implement these transactions this year remains on track.”

Sanlam Personal Finance (SPF) net result from financial services declined by 5%, largely due to the impact of new growth initiatives and dampened market conditions. Excluding the new initiatives, SPF’s contribution was 1% down on 2017 due to the major impact that the weak equity market performance in South Africa had on fund-based fee income.

SPF’s new business sales increased by 4%, an overall satisfactory result under challenging conditions. Sanlam Sky’s new business increased by an exceptional 71%. Strong growth of 13% in the traditional individual life channel was augmented by the Capitec Bank credit life new business recognised in the first half of 2018, and strong demand for the new Capitec Bank funeral product. The Recurring premium and Strategic Business Development business units also achieved strong growth of 20%, supported by the acquisition of BrightRock in 2017. Glacier new business grew marginally by 1%. Primary sales onto the Linked Investment Service Provider (LISP) platform improved by 5%, an acceptable result given the pressure on investor confidence in the mass affluent market. This was however, offset by lower sales of wrap funds and traditional life products.

The strong growth in new business volumes at Sanlam Sky had a major positive effect on SPF’s VNB growth, which increased by 7% (14% on a comparable basis).

Sanlam Emerging Markets (SEM) grew its net result from financial services by 14%. Excluding the impact of corporate activity, earnings were marginally up on 2017 (up 8% excluding the increased new business strain).

New business volumes at SEM increased by 20%. Namibia performed well, increasing new business volumes by 22% despite weak economic conditions. Both life and investment new business grew strongly. Botswana underperformed with the main detractor from new business growth being the investment line of business, which declined by 24%. This line of business is historically more volatile in nature.

The new business growth in the Rest of Africa portfolio was 68% largely due to corporate activity relating to SAHAM Finances, with the East Africa portfolio underperforming.

The Indian insurance businesses continued to perform well, achieving double-digit growth in both life and general insurance in local currency. The Malaysian businesses are finding some traction after a period of underperformance, increasing their overall new business contribution by 3%. New business production is not yet meeting expectations, but the mix of business improved at both businesses.

SEM’s VNB declined by 3% (up 6% on a consistent economic basis and excluding corporate activity). The relatively low growth on a comparable basis is largely attributable to the new business underperformance in East Africa.

Sanlam Investment Group’s (SIG) overall net result from financial services declined by 6%, attributable to lower performance fees at the third party asset manager in South Africa, administration costs incurred for system upgrades in the wealth management business and lower earnings from equity-backed financing transactions at Sanlam Specialised Finance. The other businesses did well to grow earnings, despite the pressure on funds under management due to lower investment markets.

New business volumes declined by 13% mainly due to market volatility and low investor confidence in South Africa. Institutional new inflows remained weak for the full year, while retail inflows also slowed down significantly after a more positive start to the year. The international businesses, UK, attracted strong new inflows (up 57%).

Sanlam Corporate’s net result from financial services increased by 4%, with the muted growth caused by a continuation of high group risk claims experience. Mortality and disability claims experience weakened further in the second half of the year, which is likely to require more rerating of premiums in 2019. The administration units turned profitable in 2018, a major achievement. The healthcare businesses reported satisfactory double-digit growth in earnings, while the Absa Consultants and Actuaries business made a pleasing contribution of R39 million.

New business volumes in life insurance more than doubled, reflecting an exceptional performance. Single premiums grew by 109%, while recurring premiums increased by a particularly satisfactory 56%.

The good growth in recurring and single premium business, combined with modelling improvements, supported a 64% (71% on a comparable economic basis) increase in the cluster’s VNB contribution.

Following a year of major catastrophe events in 2017, Santam experienced a relatively benign claims environment in 2018. Combined with acceptable growth in net earned premiums, it contributed to a 37% increase in gross result from financial services (41% after tax and non-controlling interest). The conventional insurance book achieved an underwriting margin of 9% in 2018 (6% in 2017).

As at 31 December 2018, discretionary capital amounted to a negative R3.7 billion before allowance for the planned B-BBEE share issuance. A number of capital management actions during 2018 affected the balance of available discretionary capital, including the US$1 billion (R13 billion) SAHAM Finances transaction. Cash proceeds from the B-BBEE share issuance will restore the discretionary capital portfolio to between R1 billion and R1.5 billion depending on the final issue price within the R74 to R86 price range approved by shareholders.

Looking forward, the Group said economic growth in South Africa would likely remain weak in the short to medium term future, and would continue to impact efforts to accelerate organic growth. The outlook for economic growth in other regions where the Group operates is more promising. Recent acquisitions such as the SAHAM transaction should also support operational performance going forward.

“We remain focused on executing our strategy. We are confident that we have the calibre of management and staff to prudently navigate the anticipated challenges going forward,” Mr Kirk concluded.

Details of the results for the 12 months ended 31 December 2018 are available at www.sanlam.com.