Political uncertainty, volatility SA’s biggest enemy

Political uncertainty and its twin, instability, are currently South Africa’s public enemy number one. And the consequential impacts are largely economic.

The really bad news is that it is also the enemy of any serious investor, or anyone trying to plan their own financial future.

Foreign direct investment is not coming anywhere near the levels that a country like South Africa should attract. Corporate South Africa is reportedly sitting on as much as R1.4-trillion in cash (some dispute the figure) which is not being invested. And private citizens are diverting funds and assets offshore.

Which is perhaps not all that bad if you are a cash-flush company or a high net worth individual and can afford to diversify and invest part or even all of your wealth offshore. But it is very bad if you are a small company or an ordinary South African whose future is intrinsically tied to this country with nowhere else to go.

Uncertainties the key political drivers

A number of major uncertainties are currently the key political drivers in South Africa, and they are likely to remain with us for quite some time. In general much of it boils down to the factional power struggle for control of the governing ANC.

This may come to a head at the party’s elective national conference scheduled for December, at which it is supposed to elect a new leadership including President Jacob Zuma’s successor. With two leading contenders in the race, the Zuma-backed Nkosazana Dlamini-Zuma and Deputy President Cyril Ramaphosa, as well as a number of other challengers, the outcome remains unpredictable.

Broken down into specifics, some of the major contributing issues revolve around

• how government will address so-called state capture and high levels of corruption, with a judicial inquiry yet to be established;
• signs that the holding of the ANC’s elective conference may even be in jeopardy, which could have knock-on effects right up to the 2019 general election;
• the possibility of another destabilising cabinet reshuffle within the context of the ongoing power struggle;
• a number of serious policy uncertainties, particularly in the backbone mining and agricultural sectors, but also affecting the financial and other sectors;
• problems afflicting coalition governments in our metros, showing just how fragile they are, with warning bells for the future, should the ANC government be replaced by a coalition of opposition parties in 2019 as some are predicting;
• restrictive labour regulations that are not being addressed;
• record high unemployment, currently worsened by major job cuts in most if not all sectors;
• serious ongoing problems regarding education and skills;
• political violence, especially in volatile KwaZulu-Natal; and
• South Africa having only just emerged from a technical recession.

From an asset management and financial planning perspective, new uncertainties have arisen in respect of pensions. There has been much recent speculation that Treasury is eyeing state employees’ pensions entrusted to the Public Investment Corporation (PIC) to bail out mismanaged parastatals. And the ANC’s policy conference held in July this year put the issue of prescribed assets – using part of people’s pensions to pay for state development – back on the political agenda.

Coming on top of all of this was the news that the World Bank has revised its growth outlook for South Africa for 2017 downwards to 0.6% from 1.1% in January. At the same time South Africa has fallen 14 positions in the 2017-2018 World Economic Forum Global Competitiveness Index (WEF GCI), with a number of the above-mentioned issues being cited as reasons.

Next ratings decisions

Hovering over all of this is the next round of decisions by global ratings agencies. Of the three major ratings agencies, S&P Global and Fitch, earlier this year downgraded South Africa’s foreign-currency rating to speculative grade, or “junk” status, following the firing of former finance minister Pravin Gordhan. Moody’s downgraded South Africa to “Baa3”, one notch above junk.

All three ratings agencies are waiting for the outcome of the ANC’s December conference, after which they are scheduled to announce their next round of decisions. The downside is that even regardless of the outcome of the ANC conference, South Africa has done little or nothing to address the issues previously raised by the agencies as motivating their decisions.

However, barring perhaps Moody’s, it seems unlikely that they will ‘punish’ South Africa with further downgrades. They may be more inclined to maintain their current ratings, but this is by no means certain. The effect of the downgrades has been to put pressure on South African asset prices while borrowing costs become more expensive, with knock-on effects throughout the economy.

Not all bad news

But lest we all sink into a state of depression, the upside is that it’s not all bad news. Firstly, there is still the potential that much-needed change could follow the ANC’s December conference.

Secondly, throughout these troubled times, South Africa’s Constitution has proven its worth, while our institutions have held their ground. Our exemplary, independent judiciary has without fail played its part with important decisions. Our robust and free media keeps us informed and stimulates social inquiry and debate.

Other institutions like Parliament, the Public Protector, the SA Reserve Bank, the Human Rights Commission, the Financial Services Board, the Competition Tribunal, and many more, all playing their part. And South Africa still has one of the world’s most sophisticated and vibrant financial systems. On top of all of that we have a vigorous and patriotic civil society that, collectively and through brave individuals, is not afraid to speak truth to power. All of this is making a difference, and will continue doing so.

Nonetheless, with all of this uncertainty, the prudent thing to do is to not react impulsively and to work with a qualified financial adviser to ensure that your portfolio is sufficiently diversified and resilient to meet the unexpected challenges thrown at us by this rapidly changing volatile world.