junk. Standard & Poor’s downgraded our foreign debt to junk (that’s about
10% of our borrowing) leaving our local debt a notch above junk. Technically we
needed two junk ratings to be considered junk as a country; and then Fitch
downgraded both local and foreign debt, so junk status is official.
the country in a very tough space with new government debt going to cost more
and a weaker rand threatening inflation. This, coupled with a GDP that is
likely to decrease, and potentially higher interest rates, means it’s going to
get very ugly for the economy.
banks were also downgraded as they cannot hold a higher rating than their
sovereign and as I write on 7 April the Fini15 Index is off some 10% since
former finance minister Pravin Gordhan was recalled from London on 27 March.
pain for the economy will only start in 2018. We’ll certainly see more tax
increases next year as the cost of new debt increases and government revenue
continues to be under pressure.
I have been positioned for this since December 2015 when then finance minister
Nhlanhla Nene was fired, and I wrote about exiting banks (except Capitec*,
which I reduced but continue to hold), being very careful of local stocks
closely related to the state of the economy, and focusing on offshore earnings
and very solid local earnings.
The next few
years are important. Following the downgrade to junk, we can expect the economy
to take at least seven years to get back to investment grade.
side is the stock market and the Top40 is about 3% higher since the Gordhan
recall, largely on the back of the rand hedge stocks moving higher. Back in
November I wrote how the Brazilian stock market rallied after its downgrade to
junk. That trend has continued with the Brazilian index, the IBOV, just off the
all-time highs from 2008. That country has even seen its currency strengthen
during that period, all while its economy has been struggling in a recession.
follow Brazil with a move higher after the dust has settled? I have no idea,
but for now my strategy is to be cautious. Our Treasury has seemingly been
captured and our state-owned enterprises (SOEs) are a mess, but my prediction
is that after the ANC elective conference in December, President Jacob Zuma
will be much weaker and will likely be recalled (or resign) in early 2018. Then
we can start rebuilding our SOEs and the economy. This is a slow process, but
one we went through before, after the apartheid state was overthrown. The
economy is nowhere near as bad as it was back in 1994.
I have been
buying some Tongaat* in the mid-R120s to below R120, otherwise I am adopting a
wait-and-see approach. If our market does start to rally higher, we’ll have
lots of time to enter positions, we don’t need to take on the risk just yet.
If you have
any debt, pay it off as rising rates will hurt. If you’re considering buying a
house or a car, downscale your plans and go for a cheaper option to reduce future debt. We need to
protect our personal balance sheets and debt will add risk, especially if
interest rates start moving higher.
important point is that this is not the end of the world. We’ve been junk
before, as have many other countries, and we’ll survive, but this is going to
be a long and painful journey.
*The writer owns shares in Capitec and
Tongaat Hulett. This
article originally appeared in the 20 April edition of finweek. Buy and download the