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Diversify your investments against the impact of likely SA credit rating downgrade.

Pen on graph chart of falling stock marketAs the bad news on the political and economic front in South Africa continues to pile up, brace yourself for an ever more likely downgrade of SA’s sovereign rating to non-investment grade levels, or junk status, by ratings agencies.

If you, as a high-net-worth investor, or even just as an ordinary individual invested in a pension fund, savings or property, have not yet factored this possibility into your investment planning, now is the time to urgently do so – through diversification that includes offshore exposure.

Never has the time been more right for you to be talking to your financial adviser.

In the latest shock development SA’s respected Finance Minister Pravin Gordhan and others have been summoned by the National Prosecuting Authority (NPA) to appear in court, charged with fraud.

This announcement came just two weeks before Mr Gordhan is to deliver his all-important – for South Africans and for the ratings agencies – medium-term budget policy statement (MTBPS). It also came despite a warning from Moody’s and others that any move to arrest or remove Minister Gordhan would threaten the continuation of current economic policy and fiscal austerity measures, and by implication, negatively affect SA’s credit rating.

Mr Gordhan has been working hard to address the warnings from ratings agencies with a view to the MTBPS, and has been talking up the state of the SA economy. All of that now seems to be in the balance.

Earlier this year all three the leading global ratings agencies warned that the political situation in South Africa, weak economic growth, mounting debt at state-owned companies, and corruption posed risks to South Africa’s credit rating. Already Moody’s has placed five state-owned entities on review for a downgrade.

Now the move against Gordhan, which is widely interpreted as being politically motivated due to his opposition to high-level corruption in government and SA’s state-owned enterprises, will most certainly influence any rating decision, the first of which is expected at the end of November. More political fall-out is anticipated as influential business leaders and senior members of the governing ANC, including former Finance Minister Trevor Manuel,  are stepping up the pressure for President Jacob Zuma to step down.

But Mr Gordhan’s adversaries are not likely to let go, while President Zuma is also resisting  the reinstatement of 783 fraud charges against him and having to answer questions from Public Protector Thuli Madonsela as part of her probe into state capture.

It is against this background that the probability of a ratings downgrade to junk status for SA seems almost unavoidable now…and that will affect you. It is imperative to take a long-term view on your investment planning.

While many high-net-worth individuals may already have diversified part of their portfolio offshore, it would be wise to assess whether more prudent planning can be effected in this regard. Those living in SA will always be invested here in some or other form through, for example, their pensions, savings or property. But even they can minimise their risk through increased exposure to offshore markets and other jurisdictions.

Even without a rating downgrade, South Africa’s economy is unlikely to rise from its low growth and low returns levels for quite some time. Global conditions that impact negatively on SA are also unlikely to ease.

And with the now seemingly unavoidable downgrade, the outlook may soon become worse. Don’t be fooled by the fact that likely higher interest rates may benefit those with existing investments or  yield-seeking international investors taking advantage of it, or the current attractiveness of the SA money market with relatively high yields found in the rand. These are short-term events subject to volatile fluctuations, and the situation could suddenly and rapidly deteriorate on this front too.

The potential negative consequences of a downgrade are numerous. In general the SA economy will be hard hit. Lending conditions will be tightened and credit will become more expensive, negatively affecting consumers, investment and business. Most likely the rand will weaken, inflation will worsen and taxes may go up to counter the effects. With more capital likely to flow out of the country, exchange controls could, for example, be tightened.

Our advice is: act before it is too late; reassess your asset allocations now; take a long-term view; diversify; and consider moving as much of your investments offshore as possible.

If you would like to find out more about the options available to you, simply fill out our contact form and one of our consultants will get in touch with you.

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