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Investing offshore the only answer to SA’s latest credit ratings

*This content is brought to you by Carrick Wealth, leaders in wealth and capital management

As South Africa’s junk status saga continues to unfold, downgrade despair set in when all three of the major global credit ratings agencies published their latest decisions for the country last week.

All the reasons listed by the agencies for their decisions, link back to this: South Africa’s uncertain and unstable political situation coupled to poor governance and the dire situation at state-owned enterprises (SOEs). The agencies indicated they will closely watch the governing ANC’s elective national conference next month and the Budget in February in the hope of any signs that things may improve. Moody’s may defer its final decision until then.

That hope, however, rests on very flimsy ground as the ANC’s December conference could go in any direction, even collapse in chaos as former Finance Minister Trevor Manuel has warned it is likely to do. And the government’s recent track record and medium-term budget policy statement (MTBPS) delivered last month, leaves equally little room for any hope of improvement come the Budget. On that front debt levels are soaring, mismanaged and corrupt state-owned enterprises continue to be a debilitating drain on state coffers, revenue income is falling and the deficit is huge, with no remedies in sight. Government deliverables are in very negative territory.

So where does that leave you, a high net worth individual with investments, savings or a pension in South Africa? Any responsible financial adviser will tell their clients now is the time to reconsider, diversify and go offshore. Take your money out of the country. Why wait until it’s too late?

Read also: Diversify offshore against uncertainty and instability

“This is indeed the advice we are giving our clients,” says Craig Featherby, CEO of leading Cape Town-based wealth and capital management firm, Carrick Wealth. “In an article we published just last week, we advised people that the best hedge against all the current risks, is to diversify at least part of one’s portfolio offshore to more stable jurisdictions that offer a good return on investment in tax-efficient structures.”

A view shows the Standard & Poor’s building in New York’s financial district. REUTERS/Brendan McDermid

“After last week I would urge this action even more strongly, even stressing that one should take more than just a part of one’s liquid portfolio, if not all of it, offshore.”

Other financial advisers, economists and various financial experts have over the last few days echoed similar views. The well-known economist Dawie Roodt, in an interview with Independent-on-Line (IOL) days before the then looming downgrades, was quoted advising South Africans to take their money out of the country as he believed the country was already in dire straits and further downgrades would send the economy into another recession. His comments followed the Auditor General’s (AG) report on the financial health of SOEs last week, showing increased irregular spending in 2016 of R45.6 billion.

Read also: Protecting your investments against possible Capital Gains Tax increases

The ratings agencies had long warned against government’s unsustainable support for mismanaged SOEs, and last week again raised this issue. They flagged Eskom in particular, and government’s declining capacity to provide financial support to distressed SOEs in general, as big concerns.

The South African economy, stuck in low growth and high unemployment for the past ten years, has been directly affected by poor governance, a precarious political situation, policy uncertainty, high levels of corruption, and of late very real threats to the country’s independent banks, with ratings agencies not even having factored the latter into their decisions yet.

To recap the developments last week: Fitch Ratings kept South Africa’s long-term foreign and local currency debt ratings at BB+, commonly referred to as ‘junk’, with a stable outlook. S&P Global downgraded South Africa’s local currency rating to BB+, and downgraded the foreign currency rating, which was already at junk, a notch further to BB. Moody’s – the most generous of the three agencies – maintained both foreign- and local-currency ratings at ‘investment grade’, but placed South Africa on review for a downgrade.

Read also: Political uncertainty, volatility SA’s biggest enemy

Two of the three major global ratings agencies have now junk-rated rand-denominated government bonds. The local currency downgrade affects approximately 90% of the government’s debt, of which an estimated 40% is currently held by foreigners who have invested in South Africa, the CEO Initiative said in a statement. It warned that the ratings announcements would lead to money leaving the country. JSE data already shows daily that outflows over the past month have averaged R134-million.

Time running out

Moody’s decision to ‘wait and see’ provides some breathing space as it means that South Africa can, for now, remain in the key Citigroup World Bond Index (WGBI). The WGBI requires that either Moody’s or S&P Global rates a country’s local currency rating as investment grade. However, with very little hope that the ANC conference or the February budget will bring improvement, this could be mere borrowed time. Economists calculate that should South Africa be dropped from Citigroup’s WGBI, this could spark a sell-off of as much as R100-billion, raising borrowing costs across the board for South Africa.

S&P’s decision to downgrade South Africa last week now excludes the country from the Barclays Global Aggregate Index, which requires a local currency investment grade rating from any two ratings agencies.

Over the weekend the Treasury – significantly weakened since former Finance Minister Pravin Gordhan’s departure – responded with a statement that it will “outline decisive and specific policy measures to strengthen the fiscal framework” in the next budget. Treasury is considering tax increases and spending cuts to save R40 billion in the 2019 fiscal year – probably a case of too little too late, while ordinary South Africans will be expected to foot the bill for government’s sins, causing a deterioration of wealth across the board.

With the situation being dire and the outlook leaving very little room for optimism, Featherby believes now is the best time to diversify away from rand-denominated investment into a hard currency elsewhere.

While the prognosis for the country is terrible, it is not a time too panic, but rather to let cool heads prevail and reassess one’s options and opportunities. And the best hedge against all the bad news and the associated risks, is to diversify offshore to more stable jurisdictions that offer a good return on investment. Consult your financial adviser about the available options and use an expert in the field of offshore investment who can structure it in the most tax-efficient manner, Featherby advises.

It is also important to have a financial adviser or advisory firm that is reputable, independent, has the necessary expertise and fully understands the rules and complexities of different offshore destinations.

To find out more about the options available, or to have a financial adviser call you, you can send an email to Carrick Wealth at [email protected].

  • Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning. Carrick is also licensed in Zimbabwe and Botswana, and holds three global licences in Mauritius. Carrick at all times maintains its  independence with regard to product providers and asset managers, and provides bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic.
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