In the last 6 months, I have heard many people making comments about how South Africa is going downhill; or how our currency will depreciate as it happened in Zimbabwe a little while back. Some people talk about leaving the country while others are having sleepless nights thinking about retrenchment or higher living costs.
Political instability combined with other economic setbacks is affecting investor confidence and South Africa is becoming a less attractive country to invest in. This lack of investor confidence is one of the primary reasons that our financial markets are performing poorly, that the rand has weakened significantly over the last few years and that economic growth has somewhat halted. Of course there are other global factors at play, such as recent economic events in China and the USA, but I will leave that discussion for another day.
Municipal elections took place last week and the result was a wake-up call for the ANC. For the first time since 1994, the ANC lost in Port Elizabeth and Pretoria. This is great news! And I am not saying that because I am taking sides. I am saying it because now the ANC will have to do a better job if they want to avoid losing more support.
The result indicates that people are voting for a better South Africa and that their votes are not just based on race. The result shows us that no party can take advantage without the repercussion of losing public support. And the result is a warning for the ANC that they better start doing a better job or else they may not be ruling South Africa in a few years’ time. This is all great news for South Africans as it will inadvertently reduce political instability in the long-run.
Here’s what you need to know…
• The result of the election has already had a positive effect on the rand. A stronger rand reduces the likelihood of an interest rate increase and lower interest rates stimulate economic growth. I can say with some confidence now - there should not be any interest rate increases for the remainder of the year and maybe also well into 2017.
• In December, the credit rating agencies will be assessing South Africa’s credit rating. South Africa was fortunate to not have been downgraded in June but there is still concern surrounding December. If South Africa is downgraded, the consequences will be severe for South Africans. I will not go in-depth (perhaps I will write a detailed article on credit rating downgrades closer to December) but in a nutshell, a downgrade for South Africa could result in an increase in inflation, increase in interest rates, increase in taxes and an increase in volatility in the financial markets, which means investments take a knock and individuals become a little less wealthy. That being said, I believe South Africa will not be getting downgraded in December. I hope I am right!
• While I do believe South Africa has a bright future ahead, I think it will always be necessary to diversify your wealth because the rand is a volatile currency. One form of diversification that I always recommend is to invest globally in order to own foreign currency, especially the US dollar. A while ago, it would have cost you more than R16 to purchase $1. Now it costs you under R14 to purchase $1. With the recent strengthening of the rand, I think this is a great time to invest globally.