Can the Rand make a comeback? Or is it too late?

More out than in

South Africans have invested more offshore than foreigners have invested into South Africa this year. This is frightening, as it has an extremely negative impact on the local currency. We need to consider both short-term sentiment and longer-term fundamentals when looking at the downward trend in the Rand.

According to RW Johnson, author of “How Long Will South Africa Survive?”, there are various structural issues that need to be addressed and fixed in order to reverse the fundamental downward drivers. These are:

• The liberalisation of the labour force
• Education on a primary and secondary level
• A huge decrease in the number of civil servants
• The allowing of inward skilled migration
• Stopping state-owned enterprises from losing money

What we all know for certain is that the current government will do none of the above. This will push South Africa towards further downgrades and ultimately an IMF bailout. The Finance Minister recently announced considerations to use state pension fund money to save the ailing SOE’s. Need I say more?

The next trigger point for South Africa is going to be the ANC National Conference in December this year. Jacob Zuma stepping down will be seen as a positive and markets may well improve after Christmas. This short-term sentimental uptick may be short-lived, depending on how Zuma’s successor deals with his populist rhetoric.

How our next president handles things like the National Health Insurance scheme, flailing state-owned enterprises and a civil service that is set to increase in size by 5% next year will be vital for the Republic. If these issues are not addressed, you can bet on more skilled South Africans continuing to emigrate.

Can we turn this ship around?

So where to now for South Africa? In all likelihood, we will bumble along until the elections in 2019. If we need a bailout, the harsh reality is that the IMF is the only option, as our new-found friends in BRICS do not have the kind of funding mechanisms that would allow us to be bailed out effectively. With an IMF bailout, severe conditions are applied and they will most likely aggressively focus on the structural issues that I mentioned earlier.

Take away all the political noise and what it boils down to is more education and job creation. This could be the turning point for South Africa – perhaps we can start to climb out of the hole that we are fast falling into.

Keep in mind that this has been the quietest time since 2011 regarding outflows from South Africa. Pessimistically, we could say that all the money that can move, has moved offshore. Another way of looking at it is that there are some very wealthy South African businesses and private individuals who are hoping that the country can turn itself around and become a premier investment destination once more.

Need advice on what to do with your Rands? Send a mail to saforex@sablerinternational.com, or call our forex team on +27 (0) 21 657 2153.