Apocalypse (Not) Now – What to do now that Moody’s has downgraded RSA to junk status

PLEASE NOTE: This article does not constitute financial advice, but provides information on the current economic situation in South Africa. Although I am a CFP® it is imperative that you run any and all financial and investment changes past a competent, registered CFP® who would examine any extenuating circumstances unique to your situation. 

It is true – the country has been down-graded by the last remaining ratings agency, Moody’s, that thought South Africa was worth investing in – somewhat. Other rating agencies already did this in 2017. The South African Minister of Finance, Tito Mboweni, said it was expected and, indeed, four days before the down-grading the bond rates increased from 8% to 12%.

Is this really, REALLY bad news? Is the end nigh?

It would be really bad news, if we don’t take into consideration that the whole world is facing two crises. We are all battling the COVID-19 virus and markets are volatile everywhere.

We have also faced major financial crises before and survived. One could look at the global financial crisis of 2007 – 2008, considered the worst since the Great Depression of the 1930s.  The housing market created an asset bubble in 2006, because of irresponsible borrowing and lending. This had tremendous ripple effects across markets and around the globe. We survived. We recovered.

Then, in 2001, there were the ‘9-11’ attacks in the USA, which were followed by initial shocks in the market, causing global stock markets to drop sharply. Trading in the USA and elsewhere around the world was disrupted as stock exchanges stopped operating out of fear of further attacks. The aftershock of these events influenced the markets long afterwards, in all corners of the world. Yet, within 14 months the markets recovered

That’s good to hear, but what about the ‘here and now’ – what about ME?

Some facts:

  • The Government will pay more for its debt

Although the cost of debt for Government will increase due to downgrade, the Reserve Bank sets the repo rate for individual debt, so this does not directly influence the rate at which you will be paying back your debt.   

  • Government bonds will be sold off

As I said in my interview on Breakfast with Friends, to a child R10 is a fortune, to an adult, it is a whisper, a note not worth picking up. To put this sale into greater context, Tito Mboweni is trying to reduce the Government wage bill by R160 billion over the next three years. Size matters. It is good to note that the Reserve Bank will spend several billion Rand on mopping up some of the bonds that will come up for sale.  

  • There will be volatility in the exchange rate between currencies

The Rand has dropped to the R18-to-the-Dollar rate already. Imports will be more expensive, but exports will bring in greater amounts of money to the tune of billions of Rand as commodities are sold in US$. We export raw materials such as coal, iron ore, manganese and gold that will make the mining industry very profitable, hence the rise in the commodities index by 6%. The potential positive impact on job creation in this sector is clear.

  • The JSE will also become more volatile

If you invested in an index fund that tracks the JSE All Share Index 12 months ago, you would have seen its value fall by 21.45%. If you invested at its highest point you would have seen a 37% drop. If you had invested in an actively managed fund, your losses would be substantially less – as low as 10%.  

What we can, and should, learn from this

  • Speak to a CFP® who  gives advice, rather than an insurance salesperson

Right now, the markets are volatile. To complicate matters further, the economic situation is changeable, because of the Corona virus. The Government is doing its best to put counter measures in place to provide relief, but not all jobs will be saved.

Your situation is unique. You need a tailor-made solution, not a one-size-fits-all product.

  • Never put all your eggs in one basket

At Northwood Financial Services, we strongly encourage our clients to diversify their assets. If you are solely relying on your pension and Retirement Annuities that are linked to the JSE you will be facing many challenges going forward. If you have broadened your portfolio to include other assets such as investment in residential property, you will not be as hard hit and a turn-around will be achieved easier and quicker.

  • You need to invest in actively managed funds

An actively managed investment fund is a fund in which a manager or a management team makes decisions about how to invest the fund’s money. Constant, active monitoring means a good fund manager will respond timeously to trends and shifts within the market. This is not done on a whim or a hunch. They will use various actuarial tools and bring considerable experience to the table in order to make informed, deliberate decisions.

A passively managed fund, by contrast, follows market index funds and exchange-traded funds that mirror an established index, such as the S&P 500. This type of fund may work well in the long-term and may seem to be a cheaper option, but can wreak havoc on your finances as it does not respond well to global crises and trends.

In this time of flux, employing the different styles of management could mean the difference between a loss of between 21.45% and 37% (passively managed fund) and a lesser loss of around 10% (actively managed fund).

So, I haven’t listen to your previous messages – what do I do now?

  • Do not panic

Remember, history repeats itself, for better or for worse. Money sparks emotions. It is closely tied to our sense of safety and security. Think rationally, not impulsively.

  •  Do not sell if you can help it

If you sell your shares now, you will be locking in your losses. When it becomes time to buy again, you will be paying more for them as prices go up.

  • Allow a financial advisor to help you construct a timeline

Now, more than ever, this is important. Your advisor will help you identify key milestones in the context of your unique circumstances, opportunities, risk profile and responsibilities. As mentioned, your advisor will be able to give you up-to-date information on tax implications as well as other forms of assistance that is available in the current economic climate.  

But WHY did Moody’s do this to us?

There are basically three reasons why our economy was down-graded to junk status:

  • Our labour market is just too rigid

There are too many regulations to get agreements around pay structures. It takes months to reach agreement around wage increases. There is an aggressive attitude between unions and bosses who do not follow cooperative processes like Germany. Often any kind of wage negotiation lands up in strife and strikes are too frequent. It is also difficult to dismiss staff if you have to do so.

However, the reality of having to pull together to prevent job losses and to deal with the impact of the virus seems to be dawning on people – on both sides of the bargaining table. Let us hope that this will spell the beginning of a new way of working together.

  • Property rights issues

The prospect of land redistribution without compensation is a real local and international concern. If you are a person living in South Africa, but you are a UK citizen, your government is going to intervene on your behalf should it become clear that you stand to lose your property.

Locals are also afraid to buy or invest further in real estate, because they, too, are also concerned about losing their properties. Noise caused by fake news is adding to the fear of prospective buyers.

Within the ruling party there are many factions with different ideas around property rights and nobody is sure which faction will win the fight. President Ramaphosa’s view was under threat, but now that we have to learn to work together, it is more difficult to oust the President! However, this does not mean that some people won’t play dirty.

We wish to point out that Zimbabwe is in the process of restoring farms to the original owners and providing compensation for lost land.

  • Load shedding

The reality is that Eskom has not really started their planned maintenance. They have been doing odd jobs, but they have also stated that they were only supposed to sign contracts at the end of March. They still need to bring in equipment and international expertise as South Africa does not have the internal capacity to conduct these activities. Due to the travel restrictions and lockdown, those with expertise cannot enter the country.

Some last words

Let’s be blunt. South Africa is in trouble – national and consumer debt is rising alarmingly. As much as SARS is trying to help, they are not going to be able to keep every business open. Sadly, people are going to lose their jobs. In the short-term this is a crisis, but remember, tomorrow is another day. It will get better. The virus will pass. We will make the changes needed to qualify for a better rating in future. We cannot look at today and assume that this is where we will stay.

The Reserve Bank has created a whole arsenal of new weapons which is now at its disposal to fight the war. As bonds are sold, the Bank is going to buy them up so that it has money at its disposal. The GDP-to-debt ratio is going to go up to 91% – we don’t have much control over that.

However, the Government has approached the International Monetary Fund (IMF). This step has not been taken lightly, because the IMF has harsh stipulations that will force government to make economic changes. These steps will bring about change and reverse the risk of runaway debt, but may come at a social cost. Government is also talking to other funding agencies and we await the outcome thereof.

It is not a total disaster. We CAN adapt and we WILL.

We must stay aware of the drivers behind our fears – we have both the down-grade and unprecedented world-wide battle against the virus to thank for our Zeitgeist. The human spirit is more resilient than we think and it is vital that we summon up the courage to take a long view during these times.

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