Helping your clients to progress their life financial plans is tough at the best of times, but for South African risk and financial advisers the journey has just become a tad more difficult. The long-suffering citizens of this beautiful country had barely dipped their toes into the New Year’s treacherous waters than they found themselves out of their depth, facing a multitude of economic curveballs, none of which are positive. This writer reckons Q1 2023 is similar to an unsuccessful batting outing on a baseball diamond. Your clients stepped up to the plate brimming with confidence, but moments later heard the disappointing call: Strike three, you’re out!
Strike one happened in February already…
For those not familiar with baseball, having three strikes against your name is a very bad thing, terminal even. So, to spice up this opinion piece, why not imagine a team of global associations and law makers taking on South Africa Inc in a life-or-death game of economic baseball.
South Africa is first up to bat, sending government to the plate to receive the first pitch from the global Financial Action Task Force (FATF). It is not the first time these competitors have met. In fact, a year-or-so ago the FATF warned the SA Government to make some ‘batting’ improvements, or else. You can read ‘What the FATF’ for a full account of this sorry saga. Suffice to say, the South African authorities were unsuccessful in implementing all of the FATF recommendations. Thus, on 24 February, the country was added to the FATF grey list of countries that have insufficient anti-money laundering and combatting of the financing of terrorism (AML-CFT) regulation in place. That, dear reader, was strike one.
Government appeared non-plussed, taking a practise swing or two. Strike one is not so bad, they mused, there are two pitches left for us to hit out of the ballpark… But the international team has top-flight pitchers up the wazoo, immediately replacing the FATF with a representative from ratings agency S&P Global. These guys throw a mean curve ball, leaving batters swinging wildly at the spot where they assumed the ball to be. Around 9 March, S&P Global revised South Africa’s credit rating outlook from positive to stable, which is a backwards shuffle to the cliff edge of another downgrade. The SA batter took a massive swing at the pitch but missed the last few seconds of its flight due to Eskom loadshedding and the impact that electricity shortages have had on the country’s GDP growth. Strike two, you’re downgraded, again.
Fix your infrastructure or bust
According to the ratings agency, government’s has made little progress in addressing infrastructure shortfalls and improving governance and performance at state-owned enterprises (SOEs) such as Eskom and Transnet. They went on to suggest that government reform the energy sector and tackle issues in the transportation sector before stepping up to the plate again. Good advice, but too late to save South Africa Inc in this game. With one strike standing between success or failure, a turncoat stepped up to replace S&P Global on the pitcher’s mound. In a striking (excuse the pun) turn of events, Statistics SA switched sides to toss a Q4 2022 speedball at the hapless SA government. Whoosh, the South African economy contracted by 1.3% quarter-on-quarter in the last period in 2022. Swish, another miss, strike three, you’re out!
On a more serious note, Thanda Sithole, FNB Senior Economist, shared an assessment of the lacklustre GDP numbers in a post-announcement media release. PS, when a private sector economist, and especially one employed by a large retail bank, includes the phrase “outlook dire amid loadshedding and slower growth” you need to take notice. Not only did the contraction exceed economists’ expectations, but it was “broad-based, with all goods-producing sectors relapsing, underscoring the severe impact of intensified loadshedding in the corresponding quarter”. FNB now expects the country’s 2023 GDP growth to come in at just 0.4%, recovering (sic) to 1.4% in 2024 and 1.6% in 2025. An electrifying admission if ever we’ve seen one… Mind you, the South African Reserve Bank (SARB) has an even gloomier 0.3% GDP forecast for this year.
Economy is suffocating under Stages 4, 5 and 6
Sadly, the third strike confirmed a long-term slump in form for South Africa Inc, and most notably its lead hitter, government. “The most significant threat to economic stability is the ongoing hard power shortages, which by our current forecast have pushed the economy into a two-quarter technical recession between the last quarter of 2022 and the first quarter of 2023,” Sithole wrote. He warned that South Africa could face a prolonged recession if actual loadshedding exceeded the bank’s baseline expectations. And this writer reckons a lengthier brush with recession is inevitable given the country has suffered uninterrupted Stage 4 or worse electricity disruptions year-to-date 10 March 2023.
Carmen Nel, Economist and Macro Strategist at Matrix Fund Managers also weighed in on the ‘shock’ economic contraction. Economic commentators were surprised by the Q4 2022 contraction, she opined, while the financial markets seemed unperturbed, with only minor weakness in the rand and a few basis points decline in rates. “Despite ending on such a low note, full year GDP growth came in at 2.0% for 2022, above trend GDP growth,” she said. Nel appeared upbeat about economic growth, but there are other issues. For example, what happens when the South African Revenue Services (SARS) loses the commodity price ‘dividend’ that has helped National Treasury to balance the nation’s books over the last two to three years?
Moving deeper into the red
Case in point, as the writer penned this newsletter a headline flashed up on News24.com proclaiming: ‘SA suffers first current account deficit in three years’. Why? The blame fell on higher imports; Eskom; and rail constraints that curbed exports. According to the SARB the balance on the current account for 2022 swung to a deficit of 0.5% of GDP, or ZAR31.8 billion, from a surplus of 3.7% in 2021. The current account is a broad measure of the country’s trade in goods and services, basically exports less imports. All else being equal, if commodity prices fall at a rate faster than the rand depreciates, SA is likely to see a progressive worsening of the current account throughout 2023. And unfortunately, a weakening currency contributes to inflation.
“One of the primary risks [to the economic outlook] is around the inflation effects of loadshedding; while loadshedding may ultimately be disinflationary via job cuts and weaker demand, the short- to medium-term impact is likely to be inflationary,” said Nel. “Businesses need to invest more in independent power production; incur higher running costs; and potentially be forced to pay employees despite inactivity due to power cuts or to pay them overtime to make up for lost production”. Another important observation is that the demand for battery backups, diesel generators and solar systems will cause significant increases in the import side of the current account.
Will interest rates stay higher for longer?
What happens to your financial advice practice if your average client has to divert ZAR100 000 in capital to solve his or her personal electricity crisis and / or burn R1 500 per month to keep some lights on? And of equal concern, what happens if inflation remains stubbornly high, delaying the end of the current interest rate hiking cycle? Earlier in the year, experts suggested we would see just two interest rate hikes before June 2023 and then no more. As long as the SARB stays hawkish, which means it will fight inflation by whatever means necessary, we can expect further interest rate hikes or a lengthier wait before the next interest rate cutting cycle begins.
The point of this “three strikes and you’re out” lament is that the day-to-day economic and macroeconomic goings on have a real and significant impact on household’s disposable income and on individual’s frame of mine. For financial and risk advisers, nothing is more trying than getting a client to buy insurance or invest for retirement when household expenses are rising, the economy is collapsing, and the client is in a funk. The risk is you place the first call, send the email, have that all-important face-to-face meeting, and still strike out.
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