Rand could weaken to R10 to the dollar on political instability

One local asset manager has warned that if South Africa does not start to find some strong political leadership in the coming months the rand could end up collapsing to more than R10 to the dollar.

That is the view of Rob Spanjaard, Investment Director at Rezco Asset Management, who says the longer that the government allows the current economic unrest to continue, the more foreigners are going to question the desirability of South Africa as an investment destination.

Even as the recent closed discussions between senior government, business, labour and community representatives wound to a close yesterday* (17 October) at the Sefako Makgatho Presidential Guesthouse, east of Pretoria, in an attempt to draft solutions on a number of levels, Spanjaard warned that South Africa remains dependent on foreign investment to fund its budget deficit and current account deficit, which amount to 4.5% and 6.5% of GDP respectively.

“Our GDP is approximately R3-trillion a year so the maths is simple. Foreigners need to invest around R150-billion per year through investment or loans to help balance South Africa’s books. This should be easily manageable since Africa is currently seen as the ‘go to’ place to get investment returns but this only remains true if the country is seen as a great place to invest.

“Unfortunately, the events at Marikana and the subsequent national downgrade by Moody’s have already had a serious impact on South Africa’s profile around the world, so to be followed so quickly by another - more serious - downgrade by S&P, as well as seemingly unending strike action, means that the picture has deteriorated even further,” says Spanjaard.

“To make matters worse, there is a couple of hundred billion rand that foreigners have invested in South African shares and government bonds over the past couple of years that theoretically could be repayable at a moment’s notice. As a result, we urgently need to find solutions to the current crises or risk the rand going into a downward spiral,” he says.

“This is what makes the current state of political and economic chaos so dangerous. If everyone wanted the money we owe them back at the same time, the country would not have the means to repay it.”

Spanjaard says it is important to remember the old adage that ‘reputations are gained slowly but lost quickly’. “It is only last month that PIMCO, one of the largest asset managers in the world, listed South Africa as among its favourite investment destinations for government bonds. Since then bond prices have lost significant value in hard currency. As a country we have fantastic potential to attract major investment but we need to be carefult to nuture our reputation.”

“Politicians who may not believe that the current unrest affects our standing as an investment destination would do well to observe the direction of the currency,” says Spanjaard. “And while presidential spokesman Mac Maharaj has told us – in the wake of these recent talks - that the government has drafted a framework to respond to the current situation of economic and political instability, this is a great first step but the fact remains that we need urgent action in order to improve public and investor confidence in the economy and to promote social stability.”

He notes that high inflation will be a significant consequence of a sharply falling rand. “Sadly it is the poor who will be the worst affected by this, as they feel the effects of inflation the most and inflation is one of the most certain results of a falling rand. Further without foreign investment the economy would shrink significantly, resulting in large job losses.”

“Investors should start dusting off the old ‘rand hedge’ playbook in order to mitigate against the recent volatility in the rand, but should stay clear of most commodity shares,” concludes Spanjaard.