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Pravin and the budget: The looming challenges facing South Africa

by Andrew Rissik | Oct 24, 2016
  • The time for putting ones head in the sand is over, SA faces some very stark and harsh realities. In May, the saga of Gordhan vs Zuma et al kicked off. The Rand had a bumpy ride before eventually returning to the long-term fundamental curve. Whilst the Rand may be technically undervalued, the potential financial fallout around the recent summons issued to Gordhan may be exaggerated due to two very sinister backdrops.

    Firstly, we have the #feesmustfall movement. This ongoing protest is one of the clearest indications that the government has lost control of the middle class in South Africa. Tertiary education is in a state of disrepair and the recent protests are both a symptom and a cause of this brokenness.

    Secondly, and in my opinion far more worrying, is Jacob Zuma’s presidency. Corruption, lack of leadership and the drive towards state capture have come to a point in the last few months. The hypocrisy of Mr Gordhan being charged, while Zuma himself has outstanding charges, is perhaps the starkest example of the corruption that has been allowed to take root in some of our most important and cherished democratic institutions.

    It is hard to believe that the majority of this government has much respect for the rule of law. Even with ANC heavyweights like Jackson Mthembu and Cyril Ramaphosa coming out in defence of Gordhan, you get the sense that those who speak out do so very carefully; adding caveats to any support they lend the embattled Finance Minister.

    That these leaders have spoken out against Zuma lends credence to the theory that there is a schism in the ruling party. Schisms are bad for party unity as they encourage instability and unpredictability. Investors, as we all know, are very averse to policy inconsistency from government. For the foreseeable future, you can expect swings in the value of the Rand to continue as political tensions alternately simmer in private and boil over in public.

    While this latest debacle hit the fan, our president was nowhere to allay fears of a total collapse. President Zuma was out of the country receiving a lukewarm reception in Kenya before moving on to Goa, India where he was rubbing shoulders with fellow emerging market politicians and at the BRICs summit.

    Incredibly, markets have had a somewhat muted response to this latest political mischief (to borrow the Finance Minister’s words). A worrying sign, as this indicates that the world is coming to expect this is the kind of behaviour. Without a serious hard turn around, this perception will be near impossible to shift and we will continue to muddle along at zero to no growth as our currency slowly devalues to the detriment of all.

    If we are not downgraded to sub-investment grade in December, we will be during the next round of ratings. This is unless Mr Gordhan can effectively address the fiscal cliff we are now set to fall off. Can this happen effectively when he is facing charges of fraud?

    Realistically, there will be delays in any court process and we could have a finance minister who becomes paralysed and caught up in focusing his attentions on surviving rather than doing his job. So, ultimately, I believe South African will be downgraded.

    Mr Gordhan is the South African government’s inconvenient truth.  He faces a tough mini-budget and I believe as any prudent Finance Minister would do, he should be cutting the civil service salary bill aggressively. His speech will determine much in South Africa’s medium-term.

    Factors push South Africans offshore

    I have had two clients call me recently, urgently looking to externalise funds to make provision for their children (now at UCT) to study in the UK. These clients, and others, are also enquiring about student visas for their children.

    The negative sentiment felt by the core upper-middle and middle-class tax paying base is at an extreme low. This will negatively affect the economy in the long-run when people have had enough and start to avoid paying taxes.

    If a downgrade does happen, the government might wish to limit capital flight. It is not unheard of for governments to implement capital control, as we’ve seen in Russia and Brazil. December is the deadline for utilizing one’s 2016 foreign capital allowance of R10m and my advice would be to use what is currently available if you have the means to.

    Fund managers in South Africa have a maximum allowance of 35% of funds under management invested offshore via their onshore asset swop facilities.  Several have reached their limit and so whilst they can’t accept any funds, currently nothing has in fact been taken away. This is indicative of the current mood in the country.

    Even though it appears that Pravin Gordhan still has some fight left in him, and while it seems Jacob Zuma might be on the back foot, we need to still keep our heads clear. Long-term the Rand is simply too unreliable to bet your future on. My advice remains, as it always has been: Diversify offshore, think about getting into high-value South African residential property in developed urban areas and hold on, because it’s going to get bumpy before it gets better.

    On top of this, last week it was all but confirmed that we would be leaving the ICC. What that means for the Rand and investor sentiment only time will tell. Surely, there is never a dull moment here in South Africa.

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