Putting from the rough as the junk status slide looms
This year’s US Masters golf tournament was famous for two things, Ernie Els’ implosion on the first hole of the tournament where he needed six puts to finish the Par 4 hole, and defending champion Jordan Spieth playing uncharacteristically bad golf on the last day of the tournament to allow a charging Danny Willett to win the coveted green jacket. It’s funny how a mental decision or a specific mindset can have a significant impact on how you carry out your job.
How does this apply to life in South Africa as we know it? Well, if we look back at the decisions taken at a political level over the past few months, let’s extend it back to December last year, we can see how a few key decisions have complicated the tight economic environment that we find ourselves in.
A rude awakening
When former Finance Minister Nhlanhla Nene was fired in December last year, the public looked on in shock and horror as the local currency lost significant ground to its international peers; the JSE also lost significant value. There was significant outcry from financial sectors asking President Jacob Zuma if he was aware of the impact of the decision, and his answer was that the losses sustained by the Rand and the JSE were not a result of Nene’s axing.
Of course he was wrong, we all know that. But while many people look at 9 December as one of the darkest days in our recent history, Daniël Kriel, CEO of Sanlam Private Wealth, says that it was one of two major watershed days in the country’s history. “It made people stand up and recognise that the ANC is not infallible. People are now standing up and making their voices heard. There is already significant pressure on the South African consumer in the form of inflation and the recent drought that the country is facing; they can’t face further pressure coming from poor political decision making,” says Kriel.
Like Els and like Spieth, the hem of Jacob Zuma’s public image slowly began to unravel. Fortunately, he eventually appointed Pravin Gordhan as the new Finance Minister, but was it a move to late?
The day South Africa rejoiced
Another landmark day in the country’s history came on 31 March this year where the Constitutional Court ruled that President Jacob Zuma disregarded the constitution when it came to the upgrades of his Nkandla homestead.
Kriel points out that this is significant because it added further pressure on the Presidency. “While the country does acknowledge that our economic climate is influenced by international challenges, continued political uncertainty and the lack of clear policies being implemented by government is having a greater impact. It is keeping international investors at arm’s length and is forcing local investors to look for greener pastures offshore,” says Kriel.
He adds that Sanlam Private Wealth is seeing increased levels of offshore investment. There has been a 25% increase in international trade when one compares 2015 figures against 2014 figures; the fourth quarter of 2015 was the country’s biggest quarter ever. Further, Kriel pointed to the fact that there was a 35% increase in trade from the first quarter of 2016 when compared to the first quarter of 2015. So the signs are ominous for another busy year.
Quadruple bogy for government and the commander-in-chief President Zuma.
Treading open water
June is crunch time for South Africa as international ratings agencies prepare themselves to reassess South Africa’s investment grade. Will the junk status hammer fall?
Dipping into junk status is bad enough, but spending a sustained period in that investment grade category will be catastrophic for the country.
Let’s say we do dip into junk status; how will we get out? Alwyn van der Merwe says it depends on a number of factors:
- If global growth accelerates, South Africa should recover. What happens internationally will impact South Africa, and we are seeing a lot of international consolidation which is a precursor for growth in some markets. This is especially true in the US where the economy typically grows after a Fed rate increase.
- Trust needs to be won back in South Africa. The cracks are starting to show within government; and if government persists with incoherent policies as it is at the moment, the implementation of an exit strategy will be long indeed.
- Gordhan can only do so much with the support he is getting from government and Big Business. He needs support from President Zuma.
South Africa is not only in the rough, but is in the deep rough when one looks at our economy. There is no greater need for financial planning than there is now. Perhaps now is the time to make a few lifestyle changes so that debt can be paid or saving can be facilitated. Imagine the joy your clients will feel if they are in a strong position when the country enters into another bull market?
Editor’s Thoughts:
It’s a bit like the song que sera sera at the moment…whatever will be will be. But it is a bitter pill to swallow if we commit Seppuku on the way into junk status. We are our own worst enemy at the moment; and the public deserves so much better from government. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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