Mailbox: SARB hands tied, Fitch walks away – protect yourself from Rand’s freefall

Biznews community reader Ludi sends out a warning to all concerned South Africans following 2 stories published on the site. He makes reference to the point made by the South African Reserve bank Governor Lesetja Kganyago that they are helpless when it comes to defending the Rand. His other concern lies with the fact that Fitch is shutting its doors in South Africa. Both he believes point to the country following in the path of Zimbabwe. An interesting take on the situation. – Stuart Lowman

A South African child holds a 50 rand note in a file photo.
A South African child holds a 50 rand note in a file photo.

From Ludi Van Der Nest

I have been keeping track of the economic situation in South Africa since immigrating to Australia, and I have to say, nothing could be more alarming than the two articles on your blog: SARB Governor Kganyago: We won’t defend the Rand, it’s pointless and the article that Fitch Ratings hands back it’s SA licence.

This response is aimed at people who want to protect themselves against the deterioration of the Rand against all other currencies and the puppets running South Africa, who can’t make sound economic decisions. At the end of the day, the citizens of South Africa will pay the price for the lack of foreign investment and the faltering of the economy as a whole.

Read Also: Power Crisis means Rand’s fall could push SA into recession, hurt not help

First of all, let me try and put it into perspective. If you just look at Zimbabwe over the last 25-30 years, they went from a country with a buoyant economy and a strong currency (The Rhodesian Dollar was at parity to the pound in 1980 after it became the Zimbabwe dollar – thanks Wikipedia) to a basket case.

(A little history of Zimbabwe might refresh your memory and show a parallel situation in South Africa.)

Mugabe and the victorious black nationalists were rather less concerned by Operation Quartz than by the possibility that there might be a mass exodus of the white community of the kind that had caused chaos in Mozambique five years earlier. Such an exodus had been prepared for by the South African government. With the agreement of the British Governor of Rhodesia, South African troops had entered the country to secure the road approaches to the Beit Bridge border crossing point. Refugee camps had been prepared in the Transvaal. On the day the election results became known, most white families had prepared contingency plans for flight, including the packing of cars and suitcases.

However, after a meeting with Robert Mugabe and the central committee of ZANU (PF), Ian Smith was reassured that whites could, and should stay in the new Zimbabwe. Mugabe promised that he would abide strictly by the terms of the Lancaster House Agreement and that changes in Zimbabwe would be made gradually and by proper legal process. In a CBS news interview, Mugabe claimed that Rhodesian whites “…are still in control of the economy, the majority being commercial farmers.” Mugabe however, would reverse his commitment to these agreements some years later; the regime began confiscating white owned farm lands. This is widely blamed for leading to the deterioration of the Zimbabwean economy which plagues the country today.

On 18 April 1980 the country became independent as the Republic of Zimbabwe, and its capital, Salisbury, was renamed Harare two years later. Today we all know the story of Zimbabwe and the effect it had of their currency.

Now I hear you ask: So what is your point? I will try to explain it as best as possible.

ANC_LogoMandela and the victorious ANC communists were rather less concerned by the economic deterioration than by the possibility that there might be a mass exodus of the white community of the kind that had caused chaos in Mozambique five years earlier. Such an exodus had NOT been prepared for by the South African government. On the day the election results became known, most white families had prepared contingency plans for flight, including the packing of cars and suitcases.

However, after a meeting with Mandela/Mbeki/Jacob Zuma and the ANC, whites were reassured that they should stay in the new South Africa. Mandela/Mbeki/Zuma promised that he would abide strictly by the terms of the agreement by the exiting government and the ANC and those changes in South Africa would be made gradually and by proper legal process. In a SABC news interview, Zuma claimed that South African whites “…are still in control of the economy, the majority being commercial farmers. Zuma however, would reverse his commitment to these agreements some years later; the regime began confiscating white owned farm lands. This is widely blamed for leading to the deterioration of the South African economy which plagues the country today.

On 1994 the country became a communist “democratic” Republic of South Africa, and its capital, Johannesburg, was renamed eGoli a few years later. Now my question to you? If the inflation in Zimbabwe eroded all the people’s wealth and the only assets that they might have had, their land was taken from them, what would you do when the ANC government start to take ownership of your property, land, nationalise banks, mines and the Rand deteriorates from R13 to R20, R35, R50, R150 to the US dollar?

Read Also: This is the future: Cees Bruggemans looks ahead to 2018 and $1 = R22.50

The only thing you can do is to protect yourself, your wealth and your family in one of two ways.

I understand that not everyone wants to leave South Africa, and I don’t say that you should. But you can protect your wealth from being eroded by inflation and political interference in the economy and your freedom. Buy as much physical gold and silver as you possible can. You don’t buy it in the hope of selling it tomorrow for a few rand more. You buy it as physical insurance against inflation and the effect that increased interest rates have on the price of goods (in the end it’s still inflation).

Don’t go and buy expensive limited edition mint that’s five times the current price of silver. Buy 99.9% silver bars at as close to the spot price of silver as possible. You need to understand that you will pay a premium over spot for any silver, but that bar will give you more silver at a better price per ounce ratio. You want to accumulate as many ounces of silver as you possible can at the lowest price possible. If situations in South Africa might become unbearable for you and your family, the silver bars will be easily taken with you to wherever you want to go. Let’s assume for a moment that the price of a bread in 6-8 years from now will be R90, and inflation at 20%, but your salary just increased by 5%. You are becoming poorer daily, but by investing in silver or gold, the price of silver and gold will reflect the change in inflation, and with precious metals at a historical low, you are buying in depressed prices, and should see your investment appreciate much more than the inflation rate.

So now I hear you say, yes but what do I do with silver and gold? I can’t buy groceries with it. Well you can sell it in ten years or when you really are in need of money. Say you’ve bought 1kg of silver for R6,571 and the rand at R14 today, and the rand keeps deteriorating to R25 to the dollar and silver went from $14.60 per ounce to $22 per ounce in 2025 then the same piece of silver would be worth R17,682. Okay so let’s assume the rand deteriorate to R25 against the dollar, but the silver price stayed the same then that same piece of silver would be worth R11,734. Do you get my point. The second way to protect you wealth would be to diversify the income you earn, and that would be to have investments in other currencies. Your retirement investment is then hedged against a depreciating rand. Now if you believe that the rand will appreciate, then I would recommend you keep your money in South Africa.

SARBBut after the comments from SARB Governor Kganyago: We won’t defend the Rand, it’s pointless, I want to make it clear what he tried to say, without spooking the markets. “As the SARB, we are unable to prevent the Rand from depreciating, as we don’t have much movement in our policies to prevent the rand from going it’s inevitable course. Sorry” The second article about Fitch Rating cutting its ties with South Africa should make you sit up straight. Yes, YOU, (the husband, wife, dog, cat and parrot and even the neighbour.) The South African government issues bonds to fund infrastructure investments in South Africa. Pension funds in South Africa and abroad buys these bonds as an investment.

Now an example would be the pensions of the South African public sector workers that were used to buy the bonds for the Sanral freeway upgrade. That money is gone, but that’s not the point. So when Sanral wanted to issue more bonds, they could not get the funding they needed as investors were unsure if they will get your investments back. Pension funds look at the ratings that agencies like Fitch, Standard & Poor and Moody’s allocate to investment instruments like bonds, and they are allowed to invest into these instruments according to the mandate that they have, as long as the investment instruments like the government bonds have a certain rating, it starts at AAA and then deteriorates from there. It’s an indication to the investor how secure their investments are, and if they will get their money back.

So Moody’s, S&P and Fitch have been warning investors for the last few years that in case the SA government does not start to take measures to improve the state entities and economy and policies etc, that the South African government bonds will be classified as junk, and that no investment institution will be able to fund projects that the government needs the funding for. The only way the South African government will be able to get funding, would be from the citizens of South Africa, (which is unlikely as most of them don’t have a job, or are on government welfare or would not borrow the South African government a broken spade, let alone money.) or the IMF.

Read Also: Investment ratings: Moody’s optimistic on debt but wage bill needs restraint

Ask yourself this. Why would Fitch close their offices in South Africa? Because they are at the point of downgrading the South African bonds, and that there is not much more that they can do, as the South African government doesn’t listen to any warnings, and that it’s now too late to turn the ship around. They might also have cut their ties, because the South African government expect/force them to hold the rating at the current level or even to improve it, and that Fitch are at the point of throwing in the towel.

I hope that this is a warning to every one, and that you will take it into consideration, before all your wealth has been deteriorated by inflation and a falling Rand. I want to see people prosper and come out unscathed the day they need to rely on their pensions and when they are most vulnerable.

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