Unpacking the 2026 Budget - With Harry Scherzer

Greg Stewart: Welcome to a special edition of No Free Lunch, where we will be talking the budget and taking a deeper look at the 2026 budget presented last week ⁓ Cape by the finance minister and the real impact on South African economy, business, and the overburdened taxpayers who've had very little return on the massive investment they've made in the country over the past three decades. And with me today to unpack all of this, is the CEO of Futurephorix, Harry Scherzer. Welcome to No Free Lunch Harry.

Harry Scherzer: Greg, thanks for having me on. Looking forward to chatting about this. Greg Stewart: Yeah, and it's been an interesting path in terms of where we were last year in terms of the budget and the disaster of the budget with the government trying to push through an astounding 21 billion in extra taxes through the back door, so to speak, then getting backlash. And this year, the budget gone much smoother and generally.

been accepted as a more optimistic budget. ⁓ take us through view and ⁓ overall view the and then we get into more detail further on? Harry Scherzer: Yeah, Greg, absolutely. as you mentioned, last year we had a bit of a disaster with the ANC pushing for a 1 % increase in VAT from 14 to 15%, which as you say, comes to an astounding figure in nominal terms.

Whereas the DA said, absolutely not. We don't have to do that. We don't have to increase taxes. There are other ways of making this work.

And that caused a lot of division and a weakening of the RAND. And so coming from there, to this year, which I would argue was a very uneventful, quite a boring budget speech. I'd argue that's a really, really good thing. I mean, you can't do much better than going from extremely poor outlook to a somewhat neutral outlook.

So overall, very little happened. There were a few surprises, the one being that the SDA, which is the Single Discretionary Allowance ⁓ for being taken out of the country, moved from Greg Stewart: Yeah. Harry Scherzer: 1 million rand to 2 million rand, which effectively means that you can now send 2 million rand up to 2 million rand out of the country without getting any form of approvals. Previously, that was 1 million rand.

But apart from that, there were no real surprises. And as a result, the rand traded in a pretty stable 5 cent margin from 15.83 to 15.88 while the budget speech took place, which is very, very stable for a key announcement.

Greg Stewart: And apart from the stability in the budget, I think we've also seen things like the tax brackets being adjusted slightly, although into account, I suppose that there was two years of zero inflationary adjustment on the tax brackets. This year's had happen, but it still leaves people in a bit of a hole compared to where inflation has been over the last three years, for instance. And a little bit of scope of relief for small businesses, especially starting out with the limit margin being increased.

I think it was two and a half million from one million somewhere around there. But it does mean that for small business starting out, that onerous requirement of VATs, reporting is done away with to certain How do you see that? Do you see that this is a budget that has helped people or is it simply a budget that is getting back on track? Harry Scherzer: Yeah, Greg, unfortunately, it's the latter.

So if we look at the tax brackets as an example, tax bracket increases increased by 3.4%, which pretty much ⁓ pretty similar to this year's worth of inflation. So really, ⁓ kind of an increase for inflation. But as you mentioned, they didn't increase it last year.

So really, they're not even back on track. If anything, we're paying more taxes in real terms than we were previously. yeah, I wouldn't say that that was a particularly astounding announcement if anything had just kept up ⁓ the prior year. ⁓ the same is true with all the other metrics you spoke of.

Nothing's particularly helpful, but nothing is being ignored on the flip side. So there's a situation where they're keeping up with what they need to. And as I mentioned, that's why it was a stable budget speech and non-eventful budget speech, but a boring budget speech. But like I said, I'm delighted with boring on this occasion.

Greg Stewart: Sometimes boring is better, isn't it? talk a bit about the ⁓ scope of savings for people. Now, ⁓ has been some adjustment that ⁓ be welcomed by, I think, a fair amount of people, ⁓ those ⁓ ⁓ heading for retirement and so on. The ⁓ on tax-free savings has increased fairly substantially from, ⁓ think it was 35.

thousand to forty five thousand or around there. And then, of course, there's ⁓ additional pension contributions and limits that have been adjusted that will also help people ⁓ though. it's it's always difficult to to comment on this because after the government taken or allowed people to 30 percent of their pensions out of the pension fund over the last couple of years, which actually helped. the GDP rate where it which wasn't great.

Now you're saying, okay, well, now we're allowing you to save more. Maybe it's ⁓ take with one hand do with the other, but how do you see that in terms of people wanting to save more? Harry Scherzer: Yeah, so it's a real balancing act, as you mentioned, Greg. You you need to increase the GDP.

That's an important metric for the country. But you also need to increase savings so that there's less burden on the government and people don't go poor in their old age. you say, you decrease one, it increases the other. So there's a real balancing act here.

And ⁓ they favored on this occasion. So they basically favored the idea of let's increase savings. As you said, it went from 36,000 to 46,000 rand, the tax-free annual limit, which basically means they're encouraging a bit more saving for people. And the reason they've been able to do that is that they are projecting higher GDP growth rates.

The aim is to be at 2 % growth rate by 2028 for context, we're currently at 1.6 % growth rate. And so... it leaves them a little bit of wiggle room to say, right, if we're growing at the rate we are, we can encourage a bit more saving to help our citizens in their old age.

But as you say, it's a bit of take with one hand, give with the other, because by increasing savings, you decrease GDP. But we've luckily got a slightly higher lever to decrease our GDP because our GDP is on track. What it really comes down to is trying to get our GDP on track through real things like Eskom, Prasa, TranceNet being under control, basically all the infrastructure projects. And if you can get that right, you've got more money to play with to increase savings and to better the lives of South Africans.

So overall, a pretty good budget speech. Not an astoundingly good one, but a pretty good budget speech. But as I said, mainly a budget speech which was completely as expected. Greg Stewart: Last week, I attended a budget panel discussion where one of the described ⁓ our current government as one that is employed investment bankers as opposed to employing ⁓ development bankers.

And and is an ongoing theme, isn't it? Because unless we start generating more GDP growth, we talk about 2 percent by 2028. We're talking about inflation rates of over 3 currently. so we still, you know, there's still a deficit.

And unless the government starts investing in things, you spoke about ESCOM, we spoke about these, but those big SOEs have got massive debt to deal with. Apart from the government debt, the government debt sitting now almost at you add the debt that the SOEs have got that That goes way beyond 80 % closer to 90%. And that's a massive amount of debt you actually have to pay off. How does the government fix that without growing the economy at a faster rate than 2 %?

Harry Scherzer: Well, it's a great question, Greg, and it's a tough one. It's a tough one to answer. mean, the first thing is that there are further talks around the private sector getting involved, which I think would be fantastic. Basically, the public sector and the government have almost proved over the last three decades that they aren't able to sustainably run these SOEs and they've failed en masse.

And so having private companies involved, I would welcome, and I think the market as a whole would welcome. And there was more talk of that. So that's the first thing I'd say, is definitely optimistic and positive as far as I'm concerned. And then the other thing is just to mention, you mentioned how there's almost 80%, I think it's 78.

9 % the debt to GDP ratio, and SOEs increase that to, as you say, closer to 90%. The one piece of good news there, which I will just mention, is that it actually stabilized for the first time in 17 years. Greg Stewart: Yes. Harry Scherzer: Every prior year, actually got worse and worse and worse.

And it's stabilized this year. And the aim is that we should actually be at an inflection point where it should start decreasing now on. So ⁓ ⁓ more going on. And I think the GNU is a big part of this.

The government is being a little bit more responsible with their spend and a bit more responsible with their infrastructure project development. which will allow for our debt to GDP ratio to decrease, which is extremely well needed. ⁓ do suspect that, along with the strengthening of the RAND, along with us being off the gray list and off the junk status of certain rating agencies, I think all of that ⁓ to basically an to improve country as a whole and the way to basically increase our GDP.

⁓ to hopefully above inflation. Greg Stewart: Yeah, you speak about infrastructure expenditure and that's certainly something that has to be accelerated. the issue on that is obviously that there was an announcement of, I can't remember the exact figure right now, but there was an improvement in terms of the infrastructure spend that was going to be allocated in the budget. The big problem about all of those things is lack of accountability.

And despite, you can spend more money and just get no results from it. And that's generally been the problem in the country. And maybe it's time that a bit of money should be spent on creating an independent body that actually holds state departments accountable, that should be completely separate ⁓ government, ⁓ not have any influence from government. almost like an external auditor the government auditor, ⁓ auditor general himself has, you know, has been with the lack of accountability.

Do you think that there's the scope for that sort of institution in our ⁓ economy? Harry Scherzer: Yeah, Greg, mean, the figure you were alluding to is over one trillion rand has been put into public infrastructure. And as you say, I don't want to think how much of that is misallocated or not allocated at all due to corruption and other reasons. So like you said, I I would absolutely welcome some independent, even an independent auditor coming in, one of the big guys like EY or Deloitte coming in and overseeing how that money is being spent because At present, as you say, the amount of money we hear being spent on this stuff and the results aren't commensurate or haven't been in the past at very least.

And so it's my hope and my suspicion that there will be more accountability with the GNU. So now suddenly at least two parties need to explain to each other within the government where that money went. So I'm hoping that has a big impact. But over and above that, a third independent party actually verifying that.

Greg Stewart: Yes. Harry Scherzer: I would absolutely welcome. So I think it's a great idea. And I think the more we can almost link private and public together, the better for the country.

That's my overall take on this. ⁓ Greg Stewart: and leaning a bit into your area of expertise in terms of Forex, the Rand is strengthened. It's strengthened quite mightily and seems to be stabilizing around that 16 Rand to the dollar. Of course, that's also bit of a mixed bag because for the exporters, ⁓ I suppose don't want to see the Forex too strong and they also don't want to see it too weak because of them parts and stuff like that.

How do you see that? Is the RAN going to stabilize? Is it stabilized? Is it peaked We seen a ⁓ lot stability than we have in the past, where this ⁓ mad with the RAN seems to have come down to a point where it's sitting okay.

How do you see that going forward for the rest of the year? Harry Scherzer: Yeah, Greg, it's a great question and a very interesting time to ask that question because we've just come off the back of a mass strike by the US and Israel on Iran and Iran retaliating to that. And so we're seeing a massive war having broken out. And so really what happened was this morning, the RAND actually opened up at closer to 16.

1 and is currently at 16.17. So it's actually weakened. and below that 16 mark or above that 16 mark, weaker than the 16 mark.

And the reason for that is actually completely out of our control. It's not South Africa's fault. It's just instability in the world. So we have to remember that as well as we do within South Africa, there are external factors which we simply can't control.

But what I'll say is that when the budget speech happened, the RAND traded in a band between 15.83 and 15.88. So...

Greg Stewart: Yeah. Harry Scherzer: Within our borders, I think we're doing a pretty good job at stabilizing the Rand and hopefully bringing it down lower than the 16 mark. However, things like this, which are out of our control, can blow us all out of the border. If America coughs, South Africa gets a cold.

We see that over and over and over again. This is just the latest that. And so I can't speak for what's going to happen globally and how secure we're going to be globally. But within our country, I do think The rand is finally on the up and I do suspect that we can strengthen further than where we are, assuming that everything in the world remains somewhat under control and that this war hopefully ends relatively soon.

My suspicion is the 1550 and even 15 to unmark are not out of the question for the end of the year, but it's dependent on not only what happens in our country, but also externally in America and the rest of the world. Greg Stewart: And that's good news generally for our economy if it remains in that stable region, not strengthening too much, not weakening too much. But in terms of the individuals, what should they be doing? Should they be buying dollars or should they be buying gold?

Harry Scherzer: That's a great question, Greg. And my take overall is what you can't go wrong either buying gold or dollars, but where you can go wrong is over leveraging to the rand. As South Africans, we have a very, very strong affinity to say, I live in South Africa, so I'm going to therefore invest in rands. And it makes sense.

This is what you see. This is what you know. This is what all the prices you see are in. The problem is that you're heavily exposed to a sharp weakening of the rand should something go wrong, either within the country or outside of the country.

so the way I see it is even if you're the most optimistic, bullish person on the rand feeling that the rand is going to come to 13, 12 to 1, it doesn't justify keeping all your money in South Africa because it's just risk mitigation at the end of the day. I'm an actuary and so for me, I always look at things from a risk centered point of view. So it feels natural to say, if you have enough wealth such that you save, A decent proportion of those savings should be off shore to ensure that you're globally wealthy, not just rand wealthy.

And that way, in a very, very unprecedented, terrible event, if the rand does what happened in Zimbabwe to the Zimbabwe dollar, you won't end up being globally poor because you've got a decent chunk of your money actually sitting abroad. so I always... preach that irrespective of your view on South Africa, I for one am very very bullish on South Africa. I do believe that the land is currently weaker than it should be.

That hasn't stopped me from putting some of my wealth abroad and I suspect the same is true for a lot of South Africans. Irrespective of how bullish you are on South Africa, I really think putting a decent proportion of your wealth into euros, pounds, or gold is a relatively safe choice. Greg Stewart: And it's also an interesting bond market currently. And we've seen all sorts of things happening with the bonds and bonds shifting.

South African bonds. I think the last issue was oversubscribed many, many times over. So there seems to be a large demand interest from overseas in South African bonds. But there's also, ⁓ as mentioned, that that thing that I want to keep things I want to keep things even in a portfolio.

So even if you buy in. ⁓ relatively safe things such as bonds, you also wanting to actually just balance your investments with some overseas exposure. What kind of exposure would you say people need to be looking at as a percentage of their investment? Harry Scherzer: So this all depends on your quality of life and your cost of living versus what you spend versus what you save.

But in my view, net of what you spend, in other words, what you have in your portfolio outside of what you spend, I would argue at least 50 % of your exposure should be offshore based. That's my take. And this is over and above what you spend. So if you're planning on spending a certain amount in South Africa, ⁓ take that out of the equation and say only what's over and above that.

you're lucky enough to have money over and above what you spend, 50 % of that, I argue, should be offshore because it's just safer. you are who ⁓ doesn't feel strongly about South Africa and the RAND, You can put more than that, but if you feel bullish on the rand and you feel the rand has a long way to go, I'd say the maximum amount you want in rand terms over and above your spending capacity would be about 50 % of your wealth. Greg Stewart: That's fantastic. Any last thoughts?

what's going to happen in the forex market? What are the other highlights? I know the yuan has gone to its strongest level in quite a while. While Indian currencies, the rupees lose in traction, all sorts of things happening with ⁓ currencies.

highlights you want to give to us as a last thought? Harry Scherzer: tell you that what we've seen from our clients who are typically importers, exporters, we've got a book of clients going out the country and into the country, the general consensus is that people are relatively optimistic about the RAND. And what I mean by that is we're assisting people who bring money into the country, take out forward exchange cover, because they're scared that the RAND is going to strengthen further and they're going to effectively lose out on the exchange rate.

whereas those sending money out the country are typically waiting because they think the round is going to get better and it will cost them less rounds per dollar. So that's the general consensus of the public. It also echoes my thinking, but regardless, none of us have a crystal ball and we can't be sure which way the round is going to go relative to major currencies. so my take is that if you're ⁓ an individual looking to hedge your round risk or if you're a business, to make payments for imports.

I'm of the view that risk mitigation is better. And so some form of forward exchange cover is necessary ⁓ if know you're to make a payment in the future to lock in your pricing now, just so it doesn't move against you and effectively destroy your margin. So can't know for sure. My take is that the ranch should strengthen.

⁓ Greg Stewart: Yeah. Harry Scherzer: But I wouldn't be surprised if it doesn't because none of us have a crystal ball. And so my best advice as ⁓ someone in this space is to take out forward exchange cover. That's what we've advised most of our clients to do.

that in turn will allow for surety of pricing rather than taking unnecessary risks. Greg Stewart: better to be sure of ⁓ level have now than perhaps to take a ⁓ wager it improving in the So great advice there. And Harry, thank you so much for joining us. Thank you for your insights.

And I hope we get to chat more regularly ⁓ on No Freed about some of the ⁓ interesting things that in the financial world. Harry Scherzer: completely agree. Yeah, thanks, Greg. It's been great to be on and please invite me back anytime.

Would love to chat.