Prepare for the gathering storm
22 Nov 2017 - by James Paynter
For a long time, the storm has been coming. A winter storm. A nasty winter storm.
And now it seems it is just about here.
The past year has seen the South African economy take a pounding from all quarters, stumbling from one crisis to the next, whether political, social or economic - be it Cabinet reshuffles, rating downgrades, negative growth, #GuptaLeaks, #StateCapture, social unrest, and, of course, several failed oustings of president Jacob Zuma.
And then, exacerbating the situation is a once-in-a-century drought that has not only created crisis-level water shortages in many sectors of the country, but driven an already dangerous (official) unemployment rate to its worst levels in 13 years.
Despite the compounding of these negative events, somehow the SA economy has kept on its wobbly feet - and kept at bay a feared implosion brought on by being downgraded to #JunkStatus.
For far too long, sadly, the Government’s inability (and lack of inclination or resolve) to accept responsibility and address this dire situation - coupled with the lack of will to cut back on expenditure and debt - has resulted in investor confidence sinking further by the day.
What really felt like the final straw was Gigaba’s mid-term mini budget speech.
While it was difficult to fault the tell-it-like-it-is attitude from Gigaba, there was one crucial flaw:
No meaningful plan to improve the situation. Nada. Zip.
And this is what caused the post-speech negative reaction from South Africans and foreign investors.
And more importantly, from ratings agency Moody’s, who have been watching the situation closely since Gigaba’s #GordhanGate appointment in March.
They desperately needed to hear the right things - fiscal discipline, a trimming back of the budget deficit and of the national debt.
Instead, we got a fully flavoured socialist budget. With radical economic transformation gravy poured over the top...
Net result: It now seems that #JunkStatus is inevitable.
A downgrade by Moody’s will be the final nail in the coffin. This will result in SA being removed from the World Government Bond Index and lead to an immediate disinvestment of at least R100 billion by foreign investors, plus significant long-term damage to the economy.
Severe recession, business downturn, more job losses and reduced revenue are all on the cards.
The economic situation facing South Africans has been never been worse.
No one can deny it.
Margaret Thatcher once said that “The trouble with socialism is that eventually you run out of other people's money.”
Too true. And we are getting to that point. Fast.
But here’s the danger:
Up to now, government has been happy for South Africans to invest freely offshore (up to R11 million per annum), as there have been sufficient incoming foreign investor funds to keep the ship afloat.
BUT that will likely change drastically when #JunkStatus hits, as an already cash-strapped government will have no power to stop the significant outflow of investor funds.
And they will have to turn their attention to outflows they can control!
If they can’t spend foreigners’ money any more, they will look closer to home. A lot closer.
The situation prompted Efficient Group’s chief economist Dawie Roodt to say just a few days ago - “Take your money out of South Africa. This country is in deep trouble.”
Some have criticised this call as irresponsible, but If we are reading the signs right, it may well be the most prudent and timely advice yet given by an economist (which is truly something)!
The situation is dire. And if anyone is not seeing it, they need to take their heads out the sand. And prepare for the coming storm.
For more info on how this could impact on the value of your rands, see www.forexforecasts.co.za/go/forecast-trial
James Paynter is Head Analyst at Dynamic Outcomes, a specialist forex solutions company that provides forecasts, tools and solutions to clients with rand foreign currency exposures, to reduce and manage their risk and optimize the timing of their transactions.