Investment: Where to next South Africa, guillotined by downgrades and Covid-19
JOHANNESBURG - I purposefully waited a few weeks before I commented on the recent Moody’s downgrade of South Africa’s sovereign credit rating to sub-investment grade (Junk status), which beheaded our economy.
It was expected, especially with the looming impact of the Covid-19 pandemic and ensuing global economic devastation.
The final chop by Moody’s on 27 March (also day one of our lockdown), which aligned them with the other two agencies, and was due to South Africa’s dismal gross domestic product (GDP) performance, inability to implement suggested economic changes and our very fragile fiscal position.
Covid-19 is both a blessing and a curse - a blessing in that the government can politically justify approaching the International Monetary Fund for help by using the pandemic as the excuse rather than the catalyst for it’s already precarious economic state.
A curse, in that all media and commentators are focused on the pandemic and the diversion from State Capture and the prosecution of perpetrators that we so desperately need to see, as well as the need for the financial cluster more urgently than ever, adopting policies that will kickstart the economy.
The reality is that, as much as we all say “thank heavens Jacob Zuma is not in charge” as we see what the government is faced with in terms of the pandemic, one can’t be blind to the fact that President Cyril Ramaphosa has missed a two-year window of opportunity to start turning South Africa around. That window has now slammed shut, as has the economy both in our country and globally.
No matter how one looks at the scenario facing South Africa, what we know is that the post Covid-19 world will look very different.
Every economy in the world is being hammered and there are no clear winners yet. One thing for sure though is that the South Africa fundamentals will be exponentially worse than our trading partners afterwards.
With April or quarter two well underway, be sure that the first quarter of 2020 will go down in history as the worst so far for the South African Rand having lost more than 22 percent of its value in the period and in the last few weeks even further declines.
This is more than an emerging market story; this is also a broader global crisis exacerbated by the locally manufactured weak economy built on failed socialist policies.
As if we needed another blow, a week later Fitch, in an unscheduled announcement, further downgraded South Africa making matters worse for the local currency.
It was two weeks after the initial downgrade that Finance Minister Tito Mboweni gave a live press conference on the matter, this shows how difficult it is to respond coherently at this time and even more difficult to predict the way forward.
There is no agreement on the effects of Covid on GDP contraction here or anywhere else in the world. South Africa now stands exposed - none of the structural challenges in South Africa’s economy have been effectively addressed and they will now become glaringly obvious.
A ray of light for me was Mboweni’s comment that the government must stop financing the likes of SAA and he went on further to say that “by closing it down would save billions of Rand that could be deployed to more urgent needs one being the COVID pandemic”.
What’s even more encouraging is a week later a funding request by SAA’s business rescue practitioners was unequivocally rejected by the government.
It’s human nature to only change when one is forced to, and this is no truer than right now. “All options are now blocked to any form of real continuation of the airline, basically now the only option is liquidation” according to analyst Peter Attard Montalto from Intellidex. Unless of course somehow Mboweni is strong armed into providing further support, something that some of his detractors will push for but the political consequences could be damaging.
True to South African government form, on the same day Pravin Gordhan, minister of Public Enterprises stated that, “we must urgently determine the operating model for a rescued airline, a sustainable financial model”. Confusing?
In a time of crisis, leaders are often given a set of circumstances to step up and take decisive action, never before has this been so important. The President must now tackle his opponents and back his economic cluster to put in place policies that they can deliver on and execute that will ensure South Africa can survive the guillotine blow that has been exacted on us.
On 21 April, our President delivered a speech to the nation promising R500bn to be used as an economic stimulus to fight the new invisible enemy; this is proportionately the same fire-power (10 percent of GDP) that’s been committed by the likes of the US and Britain. How is this going to be funded and who will have to repay it in the long run? In the meantime, all focus will be on supporting the poor and economically marginalised.
While this is understandable, 25 years of economic mismanagement and socialist policies have left economically active taxpayers very exposed.
The government’s cost of borrowing has just become higher and already declining tax revenues will be obliterated by the loss of jobs caused by the Covid-19 lockdown. Any income, assets or savings in South Africa will now become fair game for the government to target in its quest to find this money to stimulate the economy.
The Rand appreciated marginally on the news, however, it left me wondering how this will be funded, distributed and more importantly repaid.
This all in the context of South Africa, which had some healthy reserves before the culprits of state capture and other forms of corruption raided its purse at every level of the government and in every state-owned enterprise, can we really afford this and if any what reserves do we have left to fight this fight?
Some details of the package announced:
- R20 billion to fight the pandemic.
- R20 billion for emergency water supply, sanitisation of public transport and facilities, and providing food and shelter for the homeless.
- A six-month temporary COVID-19 grant of R50 billion.
- R100 billion for protection of jobs and to create jobs.
- R40 billion for income support for workers whose employers can’t pay wages.
- R200 billion loan guarantee scheme to help businesses pay salaries, rents and suppliers.
Ramaphosa also referenced the phased approach that would be taken to reopen the economy. The President has realised that to kickstart the economy, he has to put cash in the hands of consumers, now lets see if he has the will to finally start introducing policies that will see the stimulus bear fruit, policies the IMF will insist on if we get this wrong.
One must realise currently investors are panicked. As usual the Rand has been heavily speculated and there is no doubt some who have made a fortune. However, for the majority of locals whose wealth is Rand based they just got a whole lot poorer in global terms. This is a crucial time to consider whether your investment strategy still aligns with your needs, both in terms of capital protection and income generation.
While you may baulk at the current levels of the Rand, it is still a good time to look at expanding offshore portfolios and investments to ensure your exposure in South Africa is hedged.
There are some fundamentally strong companies offshore that are undervalued and even with the Rand at these levels, represent a good deal. Likewise, in the near future there will be some great real estate deals offshore too. Before you can strike quickly on these opportunities you need to ensure you have everything in place. Ensure you have sufficient allocated funds to externalise, your tax clearances are in place to move your funds and you have an offshore bank account.
Andrew Rissik is the group commercial director, managing director forex and international projects, Sable International.