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Seek a currency safe haven, despite SA’s short-term economic respite

By Mercury Fx 10 November 2019

Amidst the euphoria of the Rugby World Cup win (and the bare-faced cheek of Faf’s undies), South Africans have also had another reason to smile over the past few days – albeit through slightly gritted teeth – at ratings agency Moody’s decision on Friday to keep the country’s credit rating at Baa3. This is one notch above being downgraded to sub-investment grade, commonly known as junk status.

But despite avoiding the dreaded ‘j’-word and experiencing an immediate improvement in the value of the rand and of government bonds, this may only be a temporary dodging of the bullet. The current mixture of economic Band-Aid and sporting bonhomie will, unfortunately, soon pass.

Because in reality the country’s economy, and currency, still look to be on a concerning downward spiral. Moody’s decided to leave SA’s credit rating unchanged, but nevertheless saw fit to lower its outlook from ‘stable’ to ‘negative’, which pre-empts a further downgrade in the future. It did so because of “the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures. The challenges the government faces are evident in the continued deterioration in SA’s trend in growth and public debt burden, despite ongoing policy responses”.

Moody’s concerns reflect those of local experts in the wake of the 2019 Mini-Budget presented by Finance Minister Tito Mboweni at the end of October. While there was approval for his pull-no-punches assessment of a troubled economy, there was also alarm at the lack of government strategies to deal with the underlying challenges.

“The Minister included a very realistic statement of all the problems. However, he revealed no action on the deficit and spending cuts that were too small, as well as nothing new on economic policy and nothing yet on Eskom’s debt,” said Old Mutual Investment Group chief economist, Johann Els.

Business Unity South Africa (BUSA) echoed these sentiments. “Unfortunately, while the Minister of Finance has identified that South Africa ‘spends more than it earns’, [and] that ‘things need to be done differently’ and ‘there is no time left to act’, there is little that indicates the rest of government understands the seriousness of the economic crisis.”

The BUSA statement continued: “[While] the Minister recognises that government cannot continue to throw money at Eskom and other state-owned enterprises, it still has not presented a clear plan to resolve the financial crisis at the utility. The plans to reduce expenditure by R150-billion over the next three years and achieve a main budget primary balance by 2022/23 will require determined political leadership. To date, efforts to reduce state expenditure and the public service wage bill have not produced the desired results.”

The Eskom situation is particularly concerning. Moody’s, for example, made clear its unease on Tuesday when it downgraded the power utility’s unsecured debt (as opposed to government-guaranteed debt). In its assessment, Moody’s said that, while it noted the government’s commitment to provide financial support to Eskom, the power utility was facing a raft of challenges. These include very high indebtedness, limited revenue growth, poor plant performance, an ageing fleet and a history of weak corporate governance.

In other words, expect more of those economically damaging power cuts!

Add to this the concerns around the drought, an official unemployment rate estimated at above 38%, and a tax revenue shortfall that could be as high as R60-billion – and the economic outlook seems decidedly gloomy.

South African professionals wanting to secure their family’s future face another potential hurdle come March 1, 2020. On that date, certain categories of South Africans working abroad will lose their tax-exempt status and be required to pay SARS up to 45% of income earned abroad if it exceeds a R1-million threshold. Fringe benefits will also be taken into account.

According to the business website FIN 24, some experts are advising expats to look at financial emigration as an option. Others caution that for some expats it might not be the best choice, while yet others have mentioned the possibility of rather investing in a hard-currencies foreign pension fund in certain circumstances.

Audit, advisory and tax services firm Mazars reports that “many [expat workers] are scrambling to their bankers to financially emigrate (emigration for purposes of exchange control) to avoid having to pay more tax”. Financial emigration is an exchange-control process that enables a South African resident, with the approval of the Reserve Bank, to be classified as a non-resident of the country for tax purposes.

If you’re looking for an offshore rand hedge, Mercury FX International will set up free-to-have multicurrency accounts capable of holding various currencies
indefinitely. They can also offer better-than-bank exchange rates (around 2.5% better) to get an investor’s funds out of South Africa. In addition, they will assist with applications for tax clearance should you need to send out more funds than your allotted annual Single Discretionary Allowance of R1 million.” DM

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