World Cup euphoria has blinded South Africans to the stark reality that the country has chronic economic problems to fix – and fast. That’s the message from Magnus Heystek, an independent investment strategist who is not afraid to air his contrarian views, although he comes in for much criticism from asset managers with vested interests. The stark reality is that the government has to take decisions that will be unpopular with many ANC supporters if the country has any chance of seeing a notable improvement in economic growth any time in the foreseeable future. Heystek, a former journalist and author of popular personal finance books, has crunched numbers on government debt to make it clear exactly how big the problems are for South Africa. The RSA Titanic is in groot k#k, he warns, in this must-read piece. – Jackie Cameron

Blame the looming downgrade on the RWC victory

We’ll soon be singing the blues

By Magnus Heystek*

It was a case of extremely fortuitous timing for the ANC-government, and particularly the finance ministry, that saw the Springboks win the Rugby World Cup (RWC) days after (a) the Medium Term Budget Forecast (MTBF) on 30th October and (b) the outlook-downgrade by ratings agency Moody’s on the 1st November.

The explosion of almost unprecedented national euphoria, with the exception of a couple of EFF politicians, continued unabated across all media in SA for more than a week and even now, more than two weeks later, are the hero’s of the RWC victory still in the news, almost daily. Especially if they happen to be wearing a certain type of swimsuit.

But what it had done, was to relegate discussions and analysis on the Mboweni’s speech and Moody’s announcement to the back-pages, metaphorically speaking. Who wants to be seen as a killjoy discussing the calamitous long-term implications hidden away in the boring columns of government debt, income and expenditure, which at best of times, is seen as a reason to skip the page by most ordinary readers of news today? If a budget speech isn’t seen to be increasing taxes or the price of booze and cigarettes, the public interest tends to be fairly low.

As it is, the MTBF is not a taxing type of budget-speech. It merely serves as a glide path to the taxes and other very unpopular measures that are almost certainly to be introduced mid- to late February when the annual budget speech tends to be held. Then we will truly have forgotten the euphoria surrounding the RWC and be confronted by the harsh reality of a free-spending government that has, simply put, emptied the once -full coffers of the state.

No amount of obfuscation, PR-speak or wishful thinking will make any difference to the deep-dark hole that we as citizen and taxpayers find ourselves in. The hole is deep and we don’t have ladders high enough to get us out. In a word, we are in groot k#k.

Commentators from the commercial banks and large asset managers have been particularly muted in their commentary, carefully hedging their bets. Asset managers, on the other hand, were (and still are) are trying to convince their fee-paying clients “not too panic” – the oldest chestnut in the investment business – or the other ones “don’t abandon your long-term investment plan” or “the downgrade is already in the price.”

Hardly a day does not go by when one finds comments like this all over the financial media. It’s become the stock-standard response to anything that could be seen as negative. Hell, I read a piece by one certain Dr Roelof Botha on Netwerk24 last week where he was raving about the fact that Moody’s didn’t downgrade SA, omitting to mention that it was always the outlook that was in question, not the ratings itself.

Sunshine economists

Botha and a handful of other commentators are known as the cheerleaders of the brand of economic commentary classified as “sunshine economists”. Everything, but everything, they write has a positive spin on it, naively and dangerously so, I feel.

Is it now the time to panic?

Well, the time to panic and abandon those long-term investments strategies was several years ago, when the first downgrades started and the full disclosure of the rape and pillage under the Zuma-ANC first came too light. Much of what has been happening over the past 7 years or so has screamed one thing at me: panic and get your money offshore or into local cash/income funds. And as long-term readers of my scribblings know by now, this is exactly what I have been recommending and also practiced in my personal capacity.

This has not endeared me with the large asset houses. Invites to lunches and golf days have all but dried up. I also had the misfortune of being in the audience when a fund manager from Coronation had a full-bloodied go at me, not realising I was sitting almost right in front of him. He manages a local fund, by the way.

Asset manager commentary about the JSE has become more and more surrealist over the last couple of years. It often bears no resemblance to the unfolding economic and financial disaster SA-linked listed companies find themselves in.

I have often said that most asset managers and economists linked to the large financial groupings in SA (you know who they are, dear reader. No reason for me to spell them out) are under strict instructions to tone down their commentary about SA’s prospects.

This fact has often been admitted to me privately over the years. Attacking the government when working for one of these large groups is (a) career- limiting in the case of economists and (b) leads to an outflow of assets if you are an asset manager.

The biggest number in the budget was the one-sentence reference to the fact that SA’s national debt will increase from R3trn to R4.5trn in three years. No explanation, no more details, just that: an increase of 50% in just about a 1,000 days.

This statement alone should have consumed talk-show hosts and analysts appearing on our financial TV-shows, yet I couldn’t find many analysts dissecting this number. As it is, at current values (already up to R3.235trn since the MTBF), means that every man, woman and child in this country owes R59,530 the day they are born.

Interest payments at R176bn is already the third largest item on our budget and if debt goes to R4.5trn, will become the biggest item. In short: a debt trap.

Collapse of macro-economic fundamentals

One is therefore indebted to rare analysts such as Ann Bernstein from the Centre for Development and Enteprise (CDE) and others who have been trying to raise the alarm of the financial iceberg looming ahead in the dark, but which is ignored by most, especially the captains of the good ship RSA Titanic.

Bernstein is quite blunt. “The collapse of our macro-economic fundamentals is truly astonishing,” she writes in a research piece published last week.

She also questions the accuracy and reliability of the forecasts by SA’s treasury, until recently enjoying a very high rating in the global financial community.

Budget forecasts have been very unreliable for several years now. For seven years in a row forecasts for economic growth, tax revenue and therefore budget deficits before borrowings were shown to be so wrong as to almost render them useless.

As recently as February, Treasury estimated that public debt would peak at 60% of GDP in 2023. Now it says debt will rise to 74% of GDP and keep rising until it hits 80% by 2027. To make matters worse, these numbers exclude the debt of State Owned Enterprises (SOE’s) which would add as much as 10 to 15% to these estimates.

What are the reasons for Treasure getting it so wrong?

Forecasts for growth have been adjusted downward sharply (since February 2019). Like most private sector economists, Treasury has been under-estimating the almost near-standstill in the local economy. Which means that forecast for tax collections are down as well, coupled with the chaos it has found at SARS. SOE’s are in greater need for cash; and Government has not shown the political will to make drastic cuts in spending.

SA’s fiscal situation is so dire that, unless something drastic is done in the 100 days between the MTBF and the 2020 Budget, SA’s will be downgraded to junk by Moody’s, cost of loans will go up and which will push down the already feeble growth rate even more. This is a death spiral for any country, even more so where the unemployment rate is close to 30% of the working population.

The big question is what will happen between now and the Budget in February. Various pressure points have been building up in the economy over many years, and suddenly, like we are witnessing with the slow-motion implosion of SAA, the rivets are popping one after the other. SA and so many parts of it – think Eskom, municipalities and most SOE’s– are very close to total collapse. This is not an exaggeration, or wishful thinking – of which I no doubt would be accused of – but a realistic assessment of SA’s dire financial situation.

So many discussions are raging about what would happen if we are eventually downgrade to junk by Moody’s. Certain media commentators have been trying to a positive spin on this eventuality by either saying (a) nothing will happen or (b) its already priced in and (c) if there is a flight of capital from our bond market by virtue of us being kicked out of the World Government Bond Index (WGBI), it will be temporary and that we might even witness a new inflow of capital by virtue of our very high bond rates, the highest real rates in the world. We are talking big numbers here, ladies and gentlemen, which could soon be leaving our shores, probably around R120-150bn.

Added to that is that local markets have not reacted much to either the MTBF or the Moody’s downgrade. The rand has been remarkably stable, trading between R14,70 and R15,10 over the past 2 weeks, while the JSE has moved down a percentage point or two. But that apparent stillness conceals a massive outflow of foreign capital, in particular from our equity market. Over the past 5 years – apart from a short-lived inflow around the election of Cyril Ramaphosa as president of the ANC in December 2017 – the outflows have been relentless and very damaging.

An estimated R500bn – has left the JSE over the past 5 years. So far this year it has been R90bn and the selling continues unabated.

It therefore comes as no surprise then that the JSE has been one of the worst performing major markets over the past 5 years in particular. A dollar-investment into the JSE 5 years go so far shows no return. You basically got your money back. (See graph for reference.)

Pension funds, which are restricted by regulation and foreign exchange rules to have no more than 30% invested offshore, have been losing ground to inflation over periods now ranging from 1 to 7 years. I am finding it harder and harder to find pension/retirement funds that have matched or beaten the inflation rate over these periods.

Oh yes, we are the great pretenders

As interest in the JSE waned, so did turnover levels and profitability. More and more firms are de-listing and very few new listings seems to be contemplated. Many global stockbroking firms are either scaling back their presence on the JSE or shutting down completely.

Against this macro-economic background many asset managers keep on playing their old favourite son The Great Pretender, originally sung by The Platters but also turned into hits by Elvis Presley and Freddy Mercury.

Let me remind readers of some of the apt lyrics in this song:

“Oh yes, I am the great pretender. Pretending I am doing well.”

We are NOT doing well and the huge massive asset management industry must stop singing this song. In the absence of a dramatic reversal of the ANC’s damaging economic policies and an improvement of its fiscal management, we will continue to slide down the abyss.

As an example of this great pretence, Old Mutual earlier this year went on a national roadshow and confidently boasted that the JSE will be one of the best performing markets in the world. What concerns me was that these hopelessly over-optimistic forecasts made it to the front pages of some of SA’s leading financial websites.

Allan Gray, at the same time also stated confidently that SA assets offered much more value than global markets and brought back some of its offshore assets.

Hardly a week goes by without some local asset managers trying to convince local investors that the JSE is cheap.

So far this year this has not been a good call. US markets are up by between 24 and 28% in US dollar terms, Europe too is also up 25% while the JSE is the second worse performing major market with a return of 6,3%, marginally heading of the Hong Kong market which has been battered by ongoing riots for past 12 weeks.

Compare the performance of the JSE, whether in rands or preferably in USD, and it’s clear that the JSE has become something of a financial wasteland.

In conclusion, the government has less than a 100 days to come up with a drastic plan to save the country from a Moody’s downgrade to junk status, as it is commonly known. Its first litmus test is SAA. If government gives in to pressure from the unions and somehow find reason to pump more taxpayers money into this flying dinosaur, it will be lights out. Or pay-pay, as they say in racing circles. The race is run and we only a winner – and it’s not the country and its taxpayers.

Magnus Heystek is the investment strategist at Brenthurst Wealth.

Comment from Biznews community member Bruce Lister:

Dear Alec In your interview with Magnus, you stated that “what you write about absolutely hits what the public want to read about”. I am part of that public and do not agree with you at all. I read Magnus’ articles that you publish, as I read most of the articles you publish. He previously had a lot to add, gave good advice and insightful comments. I have had a lot of respect for his comments and observations in the past. Years ago, I even bought and read his money management book that he published. However he has increasingly become bitter, acrimonious and his comments are no longer the insightful constructive comments they were. In his own articles, he has described how he has now taken his wealth offshore and repeatedly suggests the rest of us do the same. Despite the fact that he had no problem making all this money in South Africa, and he certainly cannot claim in any form to have been hard done by in South Africa in the past. He is now enjoying the South African lifestyle, living off South African made money, while he stashes this offshore in his perceived safe havens. His negative slagging off of South Africa is boring and irritating to people who are still trying to make a difference here. And not just those in the “financial services sector (who) would prefer that independent advisor Magnus Heystek had never been born.” I am not working in the financial sector and have no vested interests in that sector – apart from using such services where I believe these add value. It may be interesting to consider if the advice and opinions Magnus is now offering completely independent of his interests in Brenthurst Wealth. Obviously any prudent investor anywhere in the world would diversify assets, including geographically. But there is still value in South Africa and this goes beyond the pleasant and very comfortable lifestyle that Magnus enjoys here. Equally obviously there are a host of problems here as well. But there are people who are staying, investing and wanting to contribute to South Africa. While reporting on the problems, challenges and issues that we South African face is very necessary, this must be constructive. As the saying goes, “it is better to light a candle than complain about the darkness” While this may be minority view, I do not share your opinion of Magnus’ current and incessant moaning. Kind regards Bruce.

(Visited 1,471 times, 7 visits today)