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South Africa’s economy is in trouble – look offshore

Audio Version

The Coronavirus is that dreaded ‘black swan’ (unpredictable occurrence) event that we need to deal with realistically and face head-on. Although it is very different to previous unexpected market crashes (e.g. 1987, 1999, and 2008) it is likely to have a similar long-term outcome: an eventual recovery back to normality.

As with previous market crashes, uncertainty is the common ingredient, which evokes fear and irrational behaviour. The bottom line is that it is highly probable that a vaccine for the Coronavirus will be formulated for mass distribution and that the world will get back to the way we know it, or even better, in our opinion. The issue is, how long will it take to get back to normal, what will the “fallout” be before we get there, how will SA be affected and what is the best investment strategy to employ to get through it all?

How long will it take the world to get back to normal?

Returning to the status quo depends on when a vaccine is available to everyone so that billions of doses can be distributed around the world. This outcome is widely accepted, and billions of dollars are being made available to develop this vaccine. The issue is, how long will it take?

To date, the quickest vaccine produced took four years, which was for Mumps. Generally, the average time frame for a new vaccine is 10 to 15 years. Currently, there are many vaccines in advance trials and manufacturing capacity has been prepared. The most optimistic (held mostly by politicians) hope for a vaccine by the end of this year and more realistic optimists hope for a vaccine by the end of next year. Both time frames would be exceptionally quick with many scientists believing it will take longer.

The challenge is that there are still so many unknowns about the virus, which therefore makes finding a holistic cure difficult to fathom.

The economic fall-out

Economically there are huge variances in forecasts for the short, medium, and long term. The IMF (International Monetary Fund) forecasts global GDP to decline 4.9% in 2020 and rebound 5.4% in 2021, depending on how quickly countries can reopen and get back to work. Clearly there is a lot of forecast risk here and a lot depends on the successful distribution of a vaccine. Therefore, it appears that at best, the global economy will only return to 2019 levels, by earliest 2022, or more realistically in 2023.

The Economist magazine describes the economic effect as the global economy only being able to operate at 90% capacity (of its potential) until a vaccine is distributed.

The SA economy is in trouble

Given SA’s weak economic position, 30% unemployment rate, low growth, and a high debt (64% debt to GDP), this pandemic is the last thing the country needed.

Treasury forecasts 2020 GDP to decline 7.2%, with some economists forecasting a 10% to 15% decline. But, with a gradual recovery of 2.6% and 1.5% in 2021 and 2022, respectively.

Although we do know the economic decline will be significant, the biggest problem is that SA’s debt will continue to increase. Treasury has increased its 2020/21 debt to GDP forecast to 82%, driven largely by a R300bn revenue shortfall. The debt is expected to continue increasing unless meaningful GDP growth takes place. We believe this is highly unlikely and the major problem area.

GDP growth can only take place with investment in the economy, which will need to be funded by government or the private sector. Government would need to reallocate expenditure to investments (such as infrastructure). The only plausible reallocation is to cut the wage bill (a 10% suggestion) to redeploy into growth assets. A reduction in wages will be resisted by Unions, which government appears not to have the political strength to take on. Alternatively, funding from the private sector also appears unlikely, due to its loss in confidence and trust in the government through many years of corruption and under delivery.

The government lacks capacity to implement growth

Even if funds are sourced for new investment, the biggest problem is that the government does not have the capacity (skills requirement) to execute the growth investments effectively.  This is SA’s biggest obstruction and it will not be rectified under the current government, in our opinion.

In the recent adjusted budget, cabinet supported an active growth policy, which is meant to start reducing debt to GDP from 2023/24 as it peaks at 87%. This would require special execution, which we believe is unlikely to materialise. Therefore, without this execution capability, debt to GDP will exceed 100% by 2023, which will likely require funding from foreign sources (such as the IMF). This will put significant strain on government finances and ultimately lead to a further weakening of the Rand.

Other funding is in the form of a prescribed asset policy, which we believe is unlikely. But government may resort to using government pensions to fund “expenditure”.

Global investment markets are risky

The JSE All Share Index (ALSI) collapsed 35% in March and has since rebounded to be down only 3%. This was all driven by offshore (dual listed) shares. The JSE ALSI, excluding JSE offshore shares, is still down 25% representing the dire outlook for the country.

The ALSI is driven by global market flows, which have been supported by a wave of central bank monetary stimulus packages and a large bet that a vaccine will be found soon. This has significantly stretched global equity valuations and therefore we believe global equities are currently risky:

  • Monetary stimulus is a one-time boost, which will become less effective the longer economic weakness continues
  • There remain many unknowns about the virus and the longer-term economic effects
  • The run up to the US election will heighten irrational behaviour by Trump, thus increasing global trade tensions and economic risk
  • A US Biden presidential win will be negative for the US markets. Currently, Biden appears a clear favourite, but a lot can change in the next four months.

The Rand remains vulnerable to further weakness

The Rand/Dollar has recovered to 16.8 from spiking out to 19.1 in March. The current purchasing power parity (PPP) value is 13.5, implying a 20% country risk premium. Given our views surrounding a potential debt crisis, it’s unlikely the Rand will strengthen materially.

Given the negative economic effect of the Coronavirus on the SA economy and Government’s lack of capacity to grow the economy, the Rand should remain weak in the medium to longer-term, unless radical positive government changes take place, which we believe are unlikely at present.

Review your existing investments and savings

It is vitally important to reassess how your savings and investments are positioned in the current environment of low SA interest rates and declining global economic growth.

One of Investonline’s Client Portfolio Managers can assist you with the assessment of your current investments, which is a worthwhile and no obligation exercise to check if your investments are on track.

Please contact us to request a full financial plan or send a statement of your existing investments to, and one of our Client Portfolio Managers will contact you for your assessment shortly thereafter.

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