CURRENCY
Long-Term Rand Pressure
Will we get diamonds , or dust ?
I
ANDREW RISSIK
Director of Forex and International Projects at Sable International
’ m not going to beat about the bush , the Rand is in a state , and I think it will continue to devalue as long as South Africa , with its shambolic economic policy framework and populist rhetoric , fails to attract long-term “ sticky ” capital . This decline may not be immediately apparent , but in the run up to the ANC ’ s elective conference in December , and well into 2018 , there are many potential pitfalls for the beleaguered local currency .
Can the outflows be turned into inflows ?
What is really frightening is that South Africans have invested more offshore than foreigners have invested into South Africa this year . This has an extremely negative impact on the local currency . When considering the downward trend in the Rand , we need to consider both short-term sentiment and longer-term fundamentals .
To reverse the fundamental downward drivers there are various structural issues that need to be addressed and fixed . According to RW Johnson , author of “ How Long Will South Africa Survive ”, these are : The liberalisation of the labour force , education from primary and secondary level , a massive decrease in the number of civil servants , allowing inward skilled migration , and stopping state-owned enterprises from losing money .
Looking at the above , what we all know for certain is that the current government will do none of them . 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 any more ?
The next visible trigger point for South Africa is going to be the December 2017 ANC National Conference . The fact that Jacob Zuma will step down will be seen as positive and markets may well improve after Christmas . This short-term sentimental uptick may be short-lived , depending on how his successor deals with Zuma ’ s populist rhetoric .
How his successor deals with 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 is vital . If these issues are not addressed , you can bet on more skilled South Africans continuing to emigrate .
Where to now for South Africa ?
In all likelihood , South Africa 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 all it boils down to is education and job creation . This could be the turning point for South Africa ; perhaps we can start the long climb out of the hole that we are fast falling into .
Keep in mind that this has been the quietest time regarding outflows from South Africa since 2011 . Pessimistically , we could say that the horse has already bolted and 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 .
58 OCTOBER 2017 SA Real Estate Investor Magazine