State Of The Nation

This week UCT has hosted a group of 57 from Rotterdam School of Management. Vietnam, India, China, Argentina, Turkey, Egypt and more – they are a diverse bunch. At the end of the week, based on the variety of speakers – a chief economist, entrepreneurs, community leaders and academics – I thought I would share some key insights from the week about the current state of the nation.

Rating downgrades
When Pravin Gordhan was trying to assure the ratings agencies of the future of SA, in order to avoid junk status, he made three big assumptions.

1.  GDP would be 2%. It currently is negative. Government spending has been the big driver of GDP growth, with over 1m jobs created in the public sector. That will not be allowed to continue however because Gordhan promised that…
2.  Government spending would be cut. With SAA receiving a bailout and huge demand for greater service from government, it would require brave leadership to spend less. The final promise he made was that…
3.  Tax revenues would increase. Given that the economy is not growing, there will be less corporate tax and VAT raised. That means personal income taxes need to be increased, but they are high already. With just over 5m taxpayers and 16m social grant recipients, SA is becoming heavily reliant on a small base.

All three ratings agencies have SA on a negative outlook for their next review. A negative outlook means that there is a 1 in 3 chance that SA will be downgraded. The lack of progress on the 3 promises above, means that this is becoming very likely.

What would junk status mean?
At the moment, foreign investors are selling SA equities but buying SA bonds. 40% of our Rand denominated debt is currently owned by foreign investors, many of these investors have mandates that only allow them to own investment grade debt. If SA is given junk status, and 40% of our debt now needs to be sold, the knock-on impact could be enormous. Clearly the price of the debt would drop and yields would increase. The SA government would need to pay more to fund its spending.

What will happen to the Rand?
Great question, but a hard one to answer. Did you know that the Rand is now the most volatile currency against the USD? It fluctuates on average R2.50 a year in either direction. Currently it is R13.43, which means in a year it could be, on average, between R10.93 and R15.93. That makes it very hard to predict! Why has it been strong recently? It is much more driven by global, as opposed to local issues. The US is growing, but slowing, and China is also slowing down. That means that investors are getting good yields out of the SA market. Junk status could reverse that investment trend however.

Any good news?
Yes. With spare capacity in manufacturing and a slowing economy, inflation is coming under control. Interest rates are not going up any time soon. Yay!

Any bad news?
Yes. The recent assault on the independence of the SA Reserve Bank has come at the wrong time. The Finance Minister has wisely opposed the Public Protectors report but yesterday she declared that she would oppose him. Our outstanding Reserve Bank Governor, Lesetja Kganyago, has a must read statement here on the issue.

That is a snapshot of the current state of the nation.  Anything you would add?

Paul Maughan

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