Navigating through Zumanomics: Rand strength, downgrades and going offshore

JOHANNESBURG — Despite having our local debt downgraded to junk recently by S&P, the rand has still recently strengthened against the US dollar on the back of Moody’s giving SA 90 days to start sorting its house out. Added to this, a recent strong showing by Cyril Ramaphosa in the ANC branch nominations has also resulted in the rand strengthening further. But a lot can still happen between now and the ANC’s conference on 16-20 December. Also, there’s still a big interest in offshore investing among South Africans. I spoke to Sable International’s Andrew Rissik about how to navigate this space. – Gareth van Zyl 

This special podcast is brought to you by Sable International and with me on the line from Cape Town is Andrew Rissik, who is the MD of Forex and International Projects at Sable International.

Andrew, it’s December already and looking back, this year has flown by. It’s been a volatile year on the political and economic front. Just looking at the Rand quickly: It strengthened this week and Moody’s have given us a slight reprieve. On the other hand, S&P (Standard & Poor’s) wasn’t that kind to us. What do you make of the Rand’s strength, currently, and is it sustainable?

The Rand’s strength that you’re referring to depends on what currency you’re looking at, because in that typical basket of hard currencies (which we always compare ourselves to) there’s a lot of volatility within those economies.

For instance, in the UK we’re seeing a lot of volatility in the Pound against a raft of currencies because of the so-called uncertainty around Brexit. It was S&P who brought our local currency to below junk and what happens is that that’s already been priced in because everybody expected it to happen. So, what happens is that it doesn’t really have the same, massive impact that we saw 18 months ago when Minister Nene was fired. That was a real political shock that came out of leftfield.

The rating agencies’ rhetoric has been very well-documented. We knew the downgrade was going to happen and what happens is people wake up and realise that life goes on, and the Rand still delivers good yields for offshore investors. So, as long as people see some sort of stability there will be a demand for the Rand in the short-term.

It looks like a downgrade from Moody’s, probably in February, is inevitable now.

I think so. Moody’s is always the one who is regarded as being the kinder of the agencies when it comes to these sorts of ratings. Fitch is certainly the most aggressive; we’ve been sub-investment grade with them for a while now. But I think a downgrade in February from Moody’s, at least on one of the currency ratings, is inevitable.

But I think this is also going to depend on what happens at the ANC elective conference in December. I think that that’s going to give an indication to the market as to what our medium- to long-term approach to the economy will be. It depends on who takes over as leader of the ANC after President Zuma.

Just getting back to that elective conference. Obviously, it’s coming up in less than three weeks from now. What are Sable International’s views on what could happen there?

Well, I’ve spoken to a couple of economists. I did a presentation recently with Dr. Roelof Botha, who is an independent economist. He does a lot of work with PwC, teaches at GIBS, and he’s a well-respected economist. He emphatically believes that Cyril Ramaphosa will take over. There are a lot of other people who I speak to who are a lot more negative.

I think we’ve still got a couple of weeks to go. We may see some interesting moves by Jacob Zuma. I would imagine he is starting to feel pretty cornered at this stage.

I think Cyril Ramaphosa looks like he’s got a lot of support and I think KZN, which was going to be the province that was going to make or break him, is looking very unstable. So, I’m mildly optimistic and, obviously, really hoping that Cyril Ramaphosa is ‘the man’.

I think in the context of it, whoever takes over is going to be perceived better by the markets than what Jacob Zuma is – so I think we’ll see an uptick either way. In the short-term (and in the medium- to longer-term as well) I think that if Ramaphosa gets it, that’s going to be good news for South Africa. I don’t think he’s going to fix things quickly but what we need to be hearing from leadership is: ‘How are we going to grow the economy?’ Forget about the politics.

The really important thing is no political agenda can get fulfilled without economic growth and that’s really the starting point. I would like to think that people who are going to be voting are sensible and get somebody in who understands business and the economy.

A big talking point this year, amid the economic and political turmoil, has been offshore investments. How should South Africans tackle this, especially in the short-term?

Offshore investment is, by any description, a very broad term. Offshore is really where you’re looking at hedging your position in South Africa. So, if you’re a person who’s living in South Africa and you’re invested here heavily, offshore becomes part of a hedging strategy to help balance your portfolio.

In these cases, you’re talking about investing in all the different asset classes offshore so, it’s very much like investing onshore. The only difference is that you’ve got foreign currency exposure. The question then becomes: What currency are you looking at and where’s the destination of the investment?

What we’re seeing is a lot of investment into the UK at the moment by, whom I would regard, as ‘savvy investors’. This is because there’s quite a good discount on the Pound at the moment amid the Brexit uncertainty. The Pound is on the back foot, so it’s a good time to be looking at the UK. But then again, you’ve got to be certain about what type of asset class you’re going into.

Are you going into equities? Are you looking at real estate? If so, what type of real estate? Whether it’s passive investment or if you’re actually physically looking to buy an active investment? What I would say to people is that if you don’t have any investments with offshore exposure you really do need to relook at that because in a global world one should be exposed globally anyway. Taking into account South Africa’s political situation – you most certainly should.

What if the situation improves in South Africa? Would it then make sense to bring your cash back and how easy or difficult could this be?

It’s much easier to bring money back into South Africa than it is to take money out. I always say to people that while the Rand is strong, it’s a great time to move money out. What’s interesting is in the last few months where we’ve seen relatively good Rand strength, given by a good run in the emerging markets, a lot of people have been holding back.

With the ANC elective conference looming, we’ve had a record month in November. It was the highest volume of Rands by both transaction and by Rand amounts that we’ve ever sent out in our business. I think people are suddenly waking up. There’s some panic going on, but it’s not really reflected in the price of the currency.

If you’re going to take your money out, take it out when the Rand is relatively strong. And if you want to bring money back, we can certainly help. It’s very easy, and again, do it when the Rand is weak and take advantage of when asset prices are relatively cheap here.

Andrew, what are some of your clients looking at, in terms of offshore investment plans, can you give us an idea? You’ve said that you’ve just had a record month?

Yes so, we’re seeing a lot of people who are just taking money and parking it in offshore banking accounts. That’s more of a currency hedge strategy. They don’t necessarily have something that they’re specifically investing in. My advice then is you can park it in an offshore bank account, but just don’t leave it in an offshore bank account for too long. This is because the returns are zero. You earn absolutely no interest in any of those types of accounts.

There are some good investments through your normal stock platforms, where you can invest in a wide range of equities, which have further offshore exposure in other markets. Then there’s real estate — this is something that’s very popular with South African private investors. The typical destinations that we’re seeing is the UK, as a destination, and funny enough, up in the so-called Northern powerhouse.

We’re seeing a lot of clients investing in the Manchester/Liverpool area. There’s an incentive for people to invest further north and, obviously, the prices are a lot more attractive than down in the southeast of the UK.

We’re also seeing people investing in places like Berlin — Australia is another very popular place (although it’s very expensive at the moment) and then the USA. There’s a certain group of South Africans who find the USA attractive, so we see a fair amount going into US real estate as well.

Andrew, what about Portugal, because that’s a country that your company is also involved with, in terms of helping South Africans get visa and citizenship by investment options there?

Part of many South Africans’ offshore strategy is to look for the so-called ‘Plan-B,’ if ever things go wrong so that they can actually physically relocate. Portugal has been a really interesting destination for us, as a company.

We started doing business there in 2012 when the Portuguese government launched the so-called ‘Golden Visa Programme,’ which gives an investor the right to reside in Portugal for a period of 5 years without having to physically relocate. So, by making an investment into real estate in Portugal, and that’s any real estate, of a minimum amount of €500 000 and more (recently, they’ve launched a category of €350 000), it gives you the right for you, your spouse, and your dependents to become residents in the EU.

What has been really interesting about Portugal is that our clients’ (we’ve got about 135 clients now) families who’ve invested in Portugal over the period have seen fantastic capital growth in their properties. Portugal, as a destination, is really on the up. So, that’s certainly something to consider if you’re looking for a European-based or a Euro-based asset, with the added bonus of getting EU residency with it.

Is it proving to be competitive compared to even the likes of the Northern UK, for example, Manchester, etc?

Yes, I think 3-4 years ago the property prices in Lisbon, being the capital of Portugal, were by European standards one of the cheapest in Europe, for a European capital city. We’ve seen in downtown Lisbon big growth. I wouldn’t say the market is in a bubble yet, but it is certainly a lot more expensive buying in prime downtown Lisbon than what it was 3 years ago. The rental market there is also very buoyant.

Comparing it to the UK, I think it’s a different investment. I would say that Lisbon and Manchester, from a pricing point of view, are probably not far apart. Whereas, if you look at prime centre of London, that’s just off the charts at the moment for the average South African investor.

What about offshore allowance options? Because allowance options have also become a hot talking topic this year among many economists, especially amid possible budget tightening in South Africa. Could we see some tightening up of those offshore allowance options for South Africans in months to come?

Just to summarise quickly. There are two allowances pre-approved by the Reserve Bank for individual taxpayers. So, as a South African registered taxpayer, you can take R1m per year as a discretionary allowance and can take up to a further R10m under what’s known as your ‘offshore capital allowance.’ Now that R10m was increased in 2015 from R4m – and this is per calendar year.

So, just for context: Before 2010, your lifetime allowance of R4m was what you could take out in your whole life. So, there’s been a massive relaxation of capital controls since 2010, but I think what we need to understand is that the Reserve Bank has still got a very strict surveillance framework and they know exactly what’s flowing in and out.

It wouldn’t be unheard of if we got a further downgrade to start seeing a capital flight from South Africa on a massive scale, which would obviously be really bad for the economy. The Finance Minister could turnaround and say, ‘we’re going to reduce the capital allowance.’ They might reduce it from R10m to R5m, or they could abolish it, but that would be a really extreme measure, and I think it would be seen as quite investor and business unfriendly. So, I think that’s more an Armageddon scenario. I think if they do that, then I think we’ve really got some challenges. I don’t foresee it happening, but I do encourage people – while the Rand is relatively well-priced and they’ve got the allowances available – to make use of  them.

If it doesn’t happen and if we don’t see a meltdown in the South African economy, so to speak, do you think that in the mid-term, let’s say 5 – 10 years, the South African government could still relax those allowance controls?

I think those capital allowances that you have now, of R11m per taxpayer per year, for all intents and purposes, there are not that many people who religiously, on the 1st January every year, can take R11m out. So, if you’re a married couple and you’re both taxpayers, you can take R22m per family – that is a lot of money. If you want to take more we can actually assist with a specific Reserve Bank approval.

We recently helped a client with a Reserve Bank application to move in excess of R1bn offshore to invest in commercial real estate in the UK. We just had to build a really good investment case as to why it was good for South Africa. So people can take more than those pre-approved allowances, it’s just a slightly more complex process. I would imagine that if they did reduce those pre-approved capital allowances that, hopefully, if one had a really good investment case to go offshore, the Reserve Bank would still be open to that, going forward.

Just as a last question, Andrew – 2017 sounds like it was a busy year for you guys, over at Sable International. What are you expecting in 2018? Do you think you’re going to have just as busy a year or even busier?

If you had asked me this question two months ago, when our forex business was actually relatively quiet, both on the inflow and on the outflow side because, everybody was waiting and seeing. What we’re seeing now, and it’s always like this towards the end of the year, people suddenly realise that they must use their allowances and, obviously, I think with the ANC’s elective conference people are taking positions.

This has been a volatile year. Volatility is good for business because people start moving wealth around the place when there’s volatility and uncertainty. I still think that 2018 is going to be an interesting year for South Africa because I don’t think that the current leadership and these guys who’ve been in power for a long time are going to fall away without a fight. I think we’re going to see a lot of interesting stuff coming out around the Gupta leaks. Yes, I think there are still going to be people who are going to be looking for the offshore options.

Andrew Rissik, it’s been an absolute pleasure talking to you today.

Gareth, thanks very much.

This special podcast was brought to you by Sable International.