In the absence of more investor-friendly policies and steps to contain runaway government spending – which have been spoken about, but never implemented – SA will slide inexorably in the medium term towards an economic crisis.

In the worst-case scenario, this would see government defaulting on its debt, a flight of capital, a collapsing currency, and government having to resort to the International Monetary Fund (IMF) for assistance. IMF assistance comes with an austerity program. Beyond that point, if there is no political will to implement austerity, the IMF and other lenders will turn their back on SA. Then the country would move into the category of a “Failed State” with probable skyrocketing inflation and unemployment, shortages of goods and mass emigration of higher-skilled workers.

Is that a realistic future? Who knows? But in the euphoria of 1994-1998, we would not have believed that the economy would look like this only 25 years later. The long term is merely the culmination of a series of short-term steps. In 2020, those strides got longer as Covid-19 worsened an already failing economy.

The Budget showed the South African economy contracted by 7.2% in 2020 and is expected to grow by 3.3% in 2021 – far slower than the projected 5.5% global economic growth. In 2022 and 2023, Minister Tito Mboweni sees South Africa’s economy growing by a mere 1.9% a year. Government debt is expected to reach 88.9% of GDP in 2025/6, better than the previous forecast of 95.3% in 2025/26, but still extraordinarily high for a country with limited revenue options and facing intense opposition from public servants to wage hikes below inflation.

“An incorrect notion has taken hold that government is ‘swimming in cash’,” Mboweni said. “Certainly, compared to last October, we are in a better place. But our assessment from the Supplementary Budget in June last year still stands: our public finances are dangerously overstretched.”

Government did not raise taxes in the Budget, as commentators had feared. But the minister flagged the intention to impose an additional tax on the assets of those who cease to be South African tax residents – specifically, their retirement funds, which were previously excluded from the net.

In its “South African Outlook 2021”, BNP Paribas SA’s senior economist Jeff Schultz said the biggest obstacles to SA’s recovery this year are a shortage of electricity, which is expected to worsen, and the slow roll-out of the Covid-19 vaccine. Schultz said cutting the wage bill will be a difficult test for government.

There is also a high probability that the cabinet will continue to prop up costly state-owned entities such as SAA, Eskom and the SABC – even though it was not specifically addressed in the budget speech.

Most private-sector economists believe that tax revenue can be increased if government follows policies that stimulate economic growth, for example by cutting the mountain of red tape on every aspect of business, from employment (including visas, quotas and minimum wages) to procurement. National Treasury conceded in the Medium-Term Budget Policy Statement (MTBPS) that government spending in the last few years has failed to stimulate economic growth, partly because of “regulations that impede innovation and productivity”.

“South Africa has reached the point where nominal spending cuts are the only route to fiscal sustainability,” Nedbank Economist Johannes Khosa said in a January report. “It will be difficult to effect in the middle of a health crisis, a shrinking economy, calls for continued financial aid from state-owned enterprises and with fierce resistance from public-sector unions. However, failure to reduce spending now will add fuel to the debt service cost burden, trigger further sovereign risk ratings’ downgrades deeper into junk status with negative feedback loops, and force even more disruptive adjustments at some point in the future.”

These are depressing words for South Africans who want to protect and grow their assets in this environment.

The Rand

On the rand, Khosa said despite the strengthening in the rand in the last quarter of 2020, it still ended the year 4% weaker against the dollar and 7.9% down against the trade-weighted basket of currencies.

“The rand is expected to hold on to most its recent gains in 2021, but the local unit will remain vulnerable to changing global risk sentiment, SA’s poor fiscal position and threat of further ratings downgrades,” he said.

Are there options available?

OrbVest and other companies have been actively encouraging South Africans to diversify and establish part of their wealth in the first world, in a stable economy, where you can sleep at night knowing that you are earning stable quarterly dividends in USD, protected by the rule of law.

OrbVest was fuelled by this need, and Martin Freeman (CEO now based in New York) together with his executive team, have certainly shown the benefits of not only investing in commercial real estate for low-risk wealth preservation, but that medical office blocks in specific states in the USA are a niche that are particularly attractive. The portfolio, now approaching $340 million, which is owned predominantly by South Africans, has generated a steady annual return averaging around 8% over the last 6 years. 

This is paid out as a dividend each quarter. Not only is this an attractive return for a stable long term real estate backed investment, but the buildings are sold at the end of a 5-year period generating an additional capital gain, which is returned to investors at the end of the period. 

Of course, we all hope that “things will get better” But the current outlook presents a real risk to those with a long-term savings goal, which might be maintaining your standard of living in retirement or looking after your children. The sensible action, particularly while the rand is showing some strength against the dollar, is to invest a substantial portion of your wealth in hard currency assets. DM/BM

OrbVest SA (Pty) Ltd is a full subsidiary of OrbVest Ltd. OrbVest SA (Pty) Ltd is a registered FSP with license Nr 50483

Brought to you by Justin Clarke, Chief Operating Officer of OrbVest.