Investing offshore the only answer to SA’s latest credit ratings

As South Africa’s junk status saga continues to unfold, downgrade despair set in when all three of the major global credit ratings agencies published their latest decisions for the country late last week.

All the reasons listed by the agencies for their decisions, link back to this: South Africa’s uncertain and unstable political situation coupled to poor governance and the dire situation at state-owned enterprises (SOEs). The agencies indicated they will closely watch the governing ANC’s elective national conference next month and the Budget in February in the hope of any signs that things may improve. Moody’s may defer its final decision until then.Invest Offshore

That hope, however, rests on very flimsy ground as the ANC’s December conference could go in any direction, even collapse in chaos as former Finance Minister Trevor Manuel has warned it is likely to do. And the government’s recent track record and medium-term budget policy statement (MTBPS) delivered last month, leaves equally little room for any hope of improvement come the Budget. On that front debt levels are soaring, mismanaged and corrupt state-owned enterprises continue to be a debilitating drain on state coffers, revenue income is falling and the deficit is huge, with no remedies in sight. Government deliverables are in very negative territory.

So where does that leave you, a high net worth individual with investments, savings or a pension in South Africa? As a responsible financial adviser committed to delivering on our clients’ best interests, it is our view that now is the time to reconsider, diversify and go offshore. Take your money out of the country. Why wait until it’s too late?

Just last week we published an article in which we advised our clients that the best hedge against all the current risks, is to diversify at least part of one’s portfolio offshore to more stable jurisdictions that offer a good return on investment in tax-efficient structures.

After last week’s downgrade, we would urge this action even more strongly, even stressing that one should take more than just a part of one’s liquid portfolio, if not all of it, offshore.

Other financial advisers, economists and various financial experts have over the last few days echoed similar views. The well-known economist Dawie Roodt, in an interview with Independent-on-Line (IOL) days before the then looming downgrades, was quoted advising South Africans to take their money out of the country as he believed the country was already in dire straits and further downgrades would send the economy into another recession. His comments followed the Auditor General’s (AG) report on the financial health of SOEs last week, showing increased irregular spending in 2016 of R45.6 billion.

The ratings agencies had long warned against government’s unsustainable support for mismanaged SOEs, and last week again raised this issue. They flagged Eskom in particular, and government’s declining capacity to provide financial support to distressed SOEs in general, as big concerns.

The South African economy, stuck in low growth and high unemployment for the past ten years, has been directly affected by poor governance, a precarious political situation, policy uncertainty, high levels of corruption, and of late very real threats to the country’s independent banks, with ratings agencies not even having factored the latter into their decisions yet.

To recap the developments last week: Fitch Ratings kept South Africa’s long-term foreign and local currency debt ratings at BB+, commonly referred to as ‘junk’, with a stable outlook. S&P Global downgraded South Africa’s local currency rating to BB+, and downgraded the foreign currency rating, which was already at junk, a notch further to BB. Moody’s – the most generous of the three agencies – maintained both foreign- and local-currency ratings at ‘investment grade’, but placed South Africa on review for a downgrade.

Two of the three major global ratings agencies have now junk-rated rand-denominated government bonds. The local currency downgrade affects approximately 90% of the government’s debt, of which an estimated 40% is currently held by foreigners who have invested in South Africa, the CEO Initiative said in a statement. It warned that the ratings announcements would lead to money leaving the country. JSE data already shows daily outflows over the past month have averaged R134-million.

 

Time running out

Moody’s decision to ‘wait and see’ provides some breathing space as it means that South Africa can, for now, remain in the key Citigroup World Bond Index (WGBI). The WGBI requires that either Moody’s or S&P Global rates a country’s local currency rating as investment grade. However, with very little hope that the ANC conference or the February budget will bring improvement, this could be mere borrowed time. Economists calculate that should South Africa be dropped from Citigroup’s WGBI, this could spark a sell-off of as much as R100-billion, raising borrowing costs across the board for South Africa.

S&P’s decision to downgrade South Africa last week now excludes the country from the Barclays Global Aggregate Index, which requires a local currency investment grade rating from any two ratings agencies.

Over the weekend the Treasury – significantly weakened since former Finance Minister Pravin Gordhan’s departure – responded with a statement that it will “outline decisive and specific policy measures to strengthen the fiscal framework” in the next budget. Treasury is considering tax increases and spending cuts to save R40 billion in the 2019 fiscal year – probably a case of too little too late, while ordinary South Africans will be expected to foot the bill for government’s sins, causing a deterioration of wealth across the board.

With the situation being dire and the outlook leaving very little room for optimism, we believe now is the best time to diversify away from rand-denominated investment into a hard currency elsewhere.

While the prognosis for the country is terrible, it is not a time too panic, but rather to let cool heads prevail and reassess one’s options and opportunities. And the best hedge against all the bad news and the associated risks, is to diversify offshore to more stable jurisdictions that offer a good return on investment. Consult your financial adviser at Carrick about the available options, and let our experts in the field of offshore investment assist you with structuring it in the most tax-efficient manner.

If you are not currently a Carrick client, contact us at wealthmanagement@carrick-wealth.com to find out about the options available to you.