Sound financial advice now more crucial than ever

It is a known fact that South Africa as an emerging market is affected by the current volatile global economic situation.  Financial experts agree that the role of financial intermediaries has never been more significant, as individuals rely increasingly more on Financial Advisers to protect their income against volatile markets. This presents challenges but also opportunities for Financial Advisers:

• Business owners will have to update their income protection regularly to match the volatile markets.
• Temporary income protection could be offered as the ideal solution to protect business owners’ cash flow should they become temporarily disabled.

The importance of income protection is underscored by the Association for Savings and Investment (South Africa). After extensive research recently, they expressed their concern that when it comes to disability income insurance, the average South African is underinsured by R900 000. When it comes to temporary disability cover, there is an even bigger gap. This is proof yet again of what FMI has been saying for years, namely that income protection is greatly undersold in the industry! As mentioned earlier the volatile global market has had a direct impact on South Africa and the local business owner. The European debt crisis compounded the global instability. Our contributing economist, Dr. Roelof Botha, in his following article explains the dynamics that gave rise to the Euro-debt problem. Most of you would have met Dr. Botha as the dynamic speaker from FMI’s road shows where he impressed with his unique ability to mix the serious business of the economy with humour. The Euro-zone debt problem Dr Roelof Botha Background During the past month, domestic and global financial headlines have been dominated by fears over the size of sovereign debt in the US and a number of European countries. Pessimistic commentators are even suggesting that the global economy may be forced back into a recession as a result of the inability of many governments to balance their books. Viewed from the perspective of enormous amounts of taxation revenues that constantly flow to governments around the globe, coupled with sound economic growth rates in most countries, this prospect seems both cynical and highly unlikely. It is also important to point out that, in principle, there should be no particular concern over a government that accrues debt, subject to the standard warning that such debt should be serviceable with some degree of comfort from taxation sources. Positive economic growth foreseen Figure 1 illustrates the estimated economic growth rates for 2011 and 2012 for the world’s six largest economies, namely the US, China, Japan, Germany, France and Britain. All of them are expected to record positive growth next year, whilst all 20 of the world’s largest emerging markets are expected to record growth of between 3% and 9% in 2012.

In terms of these forecasts, positive economic growth, combined with increasing taxation revenues, will automatically (over a period of time) lead to a reduction in sovereign fiscal deficit/GDP ratios, as long as governments contain their expenditure levels. The latter is obviously not politically popular and Europe’s need for a measure of fiscal restraint over at least the next two years has already led to a change of the political leadership in Italy, Spain and Greece. Implications for South Africa It is quite ironic that four of the Euro-Zone countries with fiscal debt problems, namely Portugal, Italy, Greece and Spain, present the acronym “PIGS”. The commentary on the inability of the governments of these countries to have responded earlier to the need to curtail their expenditures has been quite unflattering. South Africa feels the heat of the fiscal debt problems of the US & Europe in two important ways. Firstly, equity markets have become exceptionally volatile in recent months, with repeated gains and losses of between 10% and 15% in the all share index (Alsi) of the Johannesburg Stock Exchange over a relatively short period of time becoming common practice. This uncertainty obviously translates into new challenges for the income protection industry, especially for individuals that have in the past relied on capital gains from equity trading to supplement their incomes. A second influence relates to the anticipated slower growth of economies that collectively constitute the largest part of South Africa’s export market for manufactured products. The knock-on effect has already been felt by the domestic economy, with National Treasury recently having revised its growth estimates for 2011 & 2012 downwards (to 3.1% and 3.4%, respectively). Solutions at hand Fortunately, all that seems to be required to solve the fiscal debt problems of some post-industrial countries is patience (whilst growth of the economy and taxation revenues takes place). A short-term remedy is also at hand, namely the issuance by the European Central Bank of “Euro bonds”, which would immediately and dramatically lower the cost of servicing sovereign debt in several Euro-Zone countries. All that is required is some boldness on the part of the European Central Bank. Unfortunately, the political heads of the Euro-Zone would need to ratify such a move first and it could take years before consensus is reached on this issue.