Cape Town - A financial expert warned on Thursday that if South Africa does not find strong political leadership in the coming months, the rand could end up collapsing to more than R10/$.
Rob Spanjaard, investment director at Rezco Asset Management, said the longer the government allows the current economic unrest to continue, the more foreigners are going to question the desirability of South Africa as an investment destination.
Even as the closed discussions between senior government, business, labour and community representatives to draft solutions on a number of issues wound to a close on Wednesday, Spanjaard warned that South Africa remains dependent on foreign investment to fund its budget deficit and current account deficit, which amount to 4.5% and 6.5% of gross domestic product (GDP) respectively.
“Our GDP is approximately R3-trillion a year, so the maths is simple. Foreigners need to invest around R150bn per year through investment or loans to help balance South Africa’s books.
"This should be easily manageable since Africa is currently seen as the ‘go to’ place to get investment returns, but this only remains true if the country is seen as a great place to invest.
“Unfortunately, the events at Marikana and the subsequent national downgrade by Moody’s have already had a serious impact on South Africa’s profile around the world.
"For this to be followed so quickly by another - more serious - downgrade by S&P, as well as seemingly unending strike action, means that the picture has deteriorated even further,” said Spanjaard.
“To make matters worse, there is a couple of hundred billion rand that foreigners have invested in South African shares and government bonds over the past couple of years that theoretically could be repayable at a moment’s notice.
"As a result, we urgently need to find solutions to the current crises or risk the rand going into a downward spiral,” he warned.
“This is what makes the current state of political and economic chaos so dangerous. If everyone wanted the money we owe them back at the same time, the country would not have the means to repay it.”
Spanjaard said it is important to remember the old adage that "reputations are gained slowly but lost quickly".
“It is only last month that PIMCO, one of the largest asset managers in the world, listed South Africa as among its favourite investment destinations for government bonds.
"Since then bond prices have lost significant value in hard currency. As a country we have fantastic potential to attract major investment, but we need to be carefult to nuture our reputation.”
“Politicians who may not believe that the current unrest affects our standing as an investment destination would do well to observe the direction of the currency,” said Spanjaard.
“That the government has drafted a framework to respond to the current situation of economic and political instability is a great first step, but the fact remains that we need urgent action in order to improve public and investor confidence in the economy and to promote social stability.”
Spanjaard noted that high inflation will be a significant consequence of a sharply falling rand.
“Sadly, it is the poor who will be the worst affected by this, as they feel the effects of inflation the most and inflation is one of the most certain results of a falling rand.
"Without foreign investment the economy would shrink significantly, resulting in large job losses,” said Spanjaard.
- Fin24