The rand breached the R19/$ level today, hit by a toxic cocktail of load shedding and a deepening economic crisis, as well as interest rate concerns.

The Rand last traded at these levels during the height of pandemic-related market panic in April 2020, and may now be on a march to break through its worst level ever (R19.26/$).

Aggressive hikes in interest rates have also hurt the economy. While the Reserve Bank has insisted that this should help to tame inflation, the reality is also that South African interest rates need to remain competitive to protect the rand.

Investors are used to South Africa offering much higher interest rates than developed markets like the US, but following aggressive US rate hikes, that differential between the US and local rates has now shrunk, and South African rates are not that attractive anymore – which is compounded with the increased risk about the country’s economic outlook.

The rand’s latest battering comes amid growing fears that the power crisis is set to worsen, with talk of a grid collapse and a total blackout becoming more frequent among the chattering classes. South African media is rife with references to a ‘total blackout’ – a total collapse of the national energy grid. This anxiety is also reflected in the rand exchange rate, with the South African unit being one of the worst-performing emerging market currencies so far this year. There is simply no confidence left on this front, which is not a solid foundation for a currency.

On top of that, government’s support for Russia isn’t exactly helping the Rand. Pick n Pay chair Gareth Ackerman has become the latest business leader to lambast the government over its ties with Russia, warning the ANC’s support of the Eurasian military power threatened a trade agreement that allows SA exports to enter the US duty-free.

South African officials allowed a cargo plane targeted by U.S. sanctions for supporting Russia’s military efforts to land at an air force base near the capital, Pretoria, last week, a move that could further increase tensions with the United States. U.S. officials previously said the plane has been known to ship weapons for Russia’s defense forces.

The rand weakness could worsen South Africa’s worrying inflation situation, as imports like fuel will keep prices high. Food inflation currently stands at a 14-year high of 14.0%.

All of this has left the Reserve Bank in an impossible situation: interest rate hikes are harming a stricken economy, but it also has to fight inflation and protect the rand’s appeal.

In March of this year, the SARB implemented its ninth consecutive interest rate hike in this hiking cycle to bring inflation within its target range. The repo rate currently stands at a decade-long high of 7.75%. And we can expect another 25 to 50 basis points increase on the 25^th of May.

The rand was trading at R20.77 to the euro and R23.91 to the pound at midday today.

So what can you do? Firstly, get rid of your debt. Prepare for another interest rate hike this month. Watch your spending. SAVE. For the rand to stabilise, a clear implementation plan is needed to solve the electricity crisis and logistical problems, and evidence that it is being put into action, so that the economy can grow and create jobs.

Stay Savvy,

Jacques

New legislation requires all Financial Advisors to have a review ROA completed and signed by all clients annually. Please find the review record of advice below. Please complete, sign, and return to let me know when you wish to have your annual portfolio review done this year.

As some of you already know, I will be moving to the UK next week. This will in no way affect the quality of service you have become used to. With more than 90% of my local and offshore clients already serviced virtually, and with staff at my office in Roodepoort always available to assist any client who prefers signing face-to-face, I don’t foresee any difficulty in the transition.

I will always be available at this email address, as well as my Liberty email: jacques.momberg@liblink.co.za, and on WhatsApp. You can also email Gayleen at my office at gayleen.brits@liberty.co.za. Virtual meetings can be done on Teams, Zoom, WhatsApp or any virtual platform of your choice.

The review record of advice will also make it easier for us to schedule our portfolio reviews well in advance. As always, any queries, advances and servicing requests on your investments and policies throughout the year, will be attended to ASAP.

My move to the UK will also allow me to look at more offshore investment opportunities for my clients.

Some good news for next month: petrol prices are anticipated to come down by 87 cents per litre, while diesel could be cut by a much larger R1.40.

The price forecast is as follows:

• Petrol 93 & 95 will drop by 87 cents per litre
• Diesel 0.05% will drop by R1.42 per litre
• Diesel 0.005% will drop by R1.58 per litre
• Paraffin will drop by R1.12 per litre

The main driver behind the lower projected prices is a huge drop in the international product prices for petroleum, which are guided by global oil movements. This is being supported by a stronger rand versus the US dollar.

Have a good week and please remember to send me your completed and signed review record of advice.

Stay Savvy,

Jacques

With 2023 in full swing already, we would like to thank you for your continued support by choosing us with your journey to financial freedom. May this year be a blessing to you and your family!

We had a look at what some of the country’s top economists predict for the year to come. To combat the negative outlook, we also added some money savvy tips.

Economic Growth

Financial services company BNP Paribas said that South Africa will likely see weak economic growth in 2023 as the country faces global headwinds and further domestic challenges.

The company estimates 2023 GDP growth to reach 0.2% – reflecting a weaker net trade and consumption outlook.

“On top of this black growth view, we expect inflation to remain sticky for longer as the lagged effect of higher wages and rebounding service prices eat into disposable incomes, forcing more action out of the SARB (South African Reserve Bank),” said BNP Paribas.

Combined with low expected growth, the group said that stagflation risks loom large in South Africa. Stagflation refers to a period of economic hardship characterized by stagnant economic growth, high unemployment, and rising prices (inflation). Stagflation can be particularly damaging as it can lead to a decline in living standards and a decrease in investment, further inhibiting long-term economic growth.

This year in South Africa will be tougher economically than 2022, said BNP Paribas. Key trading partners such as Europe and the US are also expected to face headwinds.

The long-standing energy insecurity domestically is likely to intensify – halting economic progress even more.

Labour and inflation

Like other countries across the globe, South Africa faces disinflation in 2023, particularly in the second half of the year. This is not the first warning of stagflation in South Africa. In May2022, the SARB noted that global stagflation is one of the major concerns for the economy.

The central bank said that continuous slow and inequitable growth, rising inflation, and extra pressure on key sectors of the financial system would all result from stagflation.

Jeff Schultz, said in November2022, that the Reserve Bank would unlikely slow down on rate hikes, contributing further to a rough period of stagflation.

Most economists forecast an average CPI rate of 6.0% in 2023 after 6.9% in 2022 – implying two straight years at or above the SARB’s less-desired upper 6% target bank. Until food and public transport price rises move out of the double-digit territory, inflation expectations will struggle to lower.

With high unemployment a key driver of stagflation, higher wage demands places additional pressure on the economy.

Interest Rates

Prominent economists expect the South African Reserve Bank (SARB) to increase rates twice in the first half of 2023.

In November 2022, the SARB’s Monetary Policy Committee (MPC) increased the repo rate by 0.75 basis points to 7%. It was the eighth interest rate hike in the current cycle, with a total of 350 basis points increase since the hike cycle started a year ago in November 2021.

The Reserve Bank is expected to continue increasing rates as there are still concerns about inflation.

Nedbank chief economist Nicky Weimar predicts two more 25 basis point rate hikes within the first half of 2023.

Loadshedding

BNP Paribas forecasts more than 200 days of load shedding in 2023, mostly between stages 3 and 4 – compared to last year’s ‘norm’ of stages 1 and 2.

South Africans should expect load shedding to get worse in 2023, says Intellidex analysts Peter Attard Montalto, who forecasts stage 7 load shedding – or higher – by the middle of the year.

Estimations are that the prolonged Stage 6 load shedding wipes out approximately R4 billion from GDP each day, far surpassing the economic impact of Covid-19. Some economists estimate that the SA economy would be 8% to 10% larger if Eskom had not failed to electrify the country.

Department of Social Development

In a presentation to parliament this week, the department said that about 31% of the South African population relies on social grants – which include everything from disability to childcare.

However, there are approximately 10 million beneficiaries who depend on the grant. This means that almost 30 million of South Africa’s 60-million citizens are now welfare recipients.

Confidence

Confidence in South Africa’s future has fallen after more than a decade when average economic growth failed to match the increase in population, meaning the country’s citizens have been getting poorer. The country has been afflicted by corruption scandals in recent years and regular power outages since 2014. More than 350 people died in a spate of looting and arson in July 2021. This day of looting came with a hefty R50 billion price tag. The violence reflects an economy that has been “stagnant for more than a decade,” said Gerbrandt van Heerden, an analyst at the Johannesburg-based think tank. “A lot of the unrest that South Africa has experienced this year and before are connected to a failing state.”

Data shows there is a strong correlation between economic growth and social stability and rioting and looting could become more prevalent in the next few years unless the authorities are serious about implementing reforms. Small business will likely suffer the most from frequent unrest and higher crime levels will weigh on South Africa’s ability to attract investment, he said.

The government has formally adopted five blueprints to boost gross domestic product and job creation since the ANC won the nation’s first all-race elections 27 years ago. However, most of the policies have been stalled by powerful vested interests and policy paralysis, which left Africa’s most-industrialised economy stuck in its longest downward cycle since World War II even before the coronavirus pandemic hit output.

A recent study shows that 53% of university graduates and 43% of citizens earning more than R20,000 a month may leave the country. If an increasing number of South Africa’s richest people leave the country, the number of those paying tax, which supports welfare payments to almost half of South Africans and other government services, will plunge.

Our Tips: Budget, Get rid of debt, Save and Inspect

Budget– know exactly where all your money goes, where you can adjust to save even small amounts, and how to effectively save and leave enough money for unexpected expenses and emergencies.

Get rid of debt– whether it’s an inheritance, a bonus, investment returns or winnings from a competition, any extra income should be put towards paying off debt.

Save- set aside a certain amount for savings and investments. This money can be put aside for a big goal such as a holiday or education, or it can used for a rainy day or to take care of expenses due to loss of income.

Inspect– re-evaluate their fixed monthly expenses on memberships, subscriptions, and insurance. There may be memberships and subscriptions that are being paid for but are not in use now.

Stay Savvy,

Jacques

Our updated website is now live! And with that I have some news to share: We now offer financial coaching, where we will be taking a closer look at the behavioural side of finance and how to help keep emotions from derailing long-term financial success. Whether it’s designing a plan for your retirement goals, budgeting, implementing immediate debt control or understanding your relationship with money, we want to be there to guide you.

Over the past 22 years as a financial planner, I have come to realise the importance of the psychology of money and our behaviour towards it. I have always been fascinated with how much our childhood understanding and relationship with money, the environment we grew up in, our parents’ relationship with money and what we perceive as happiness through wealth, all have an impact on our future money decisions.

Morgan Housel wrote that “doing well with money has little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people. A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary people with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence.”

We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance). Money is everywhere, it affects all of us, and confuses most of us. Everyone thinks about it a little differently. It offers lessons on things that apply to many areas of life, like risk, confidence, and happiness.

Few topics offer a more powerful magnifying glass that helps explain why people behave the way they do than money. It is one of the greatest shows on Earth.

We need to relook at the way we approach money. Big goals take big commitment. Doing something new or scary is always better (and more likely to happen) with a partner or a guide. That is where our financial coaching comes in. Financial coaching is a specialised type of coaching that helps clients develop financial literacy and money management skills.

The more you earn, the more you spend, the bigger the house, the car, the fancier the restaurants, the more elaborate the holidays, the higher the debt ratio. We are bombarded by “the good life” on every single media platform. We believe all those luxuries will make us happy.

Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.  More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that will create true happiness.

Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.

We would love to be a mentor to help grow your skills, make better decisions, gain new perspectives, or provide you with the tools that can help with goal-setting and intentional living.  Whatever you want to achieve through our financial coaching sessions, we would love to guide you on your journey to financial freedom.

Stay Savvy,

 Jacques

The South African Reserve Bank decided to increase the Repo rate (Repurchase Rate) by a further 75bps to 6.25% at its MPC meeting last Thursday. The decision was not unanimous, with two members of the MPC preferring an increase of 100bps. The decision was in line with market expectations, although some analysts had argued that the better-than-expected core inflation data for August (released last week), coupled with Stage 5/6 electricity outages should have encouraged the Bank to hike rates by only 50bps. Instead, the MPC statement highlighted the upside risks to SA inflation and made it clear that the Reserve Bank is committed to getting SA inflation firmly back inside the target range. The fact that two MPC members voted for a hike of 100bps emphasised the hawkish tone of the MPC decision. The Reserve Bank last adjusted interest rates on 21 July 2022, when they increased the Repo rate by 75bps. Since November 2021, the Repo rate has now increased by a total of 275bps. South Africa’s prime interest rate should now increase to 9.75%.

The Reserve Bank once again highlighted the upside risks to SA inflation, which is still focused on a wide range of factors, including food, fuel, and wages, but they also continued to flag concerns about the cost of electricity as well as the potential impact of further currency weakness. The Bank’s forecast for headline inflation in 2022 is unchanged at 6.5% but they revised their 2023 estimate down to 5.3% from 5.7% previously. For 2024, the Bank’s inflation forecast is fractionally lower at 4.6%, down from 4.7% previously. In that regard, it is a little odd that the MPC would highlight that the risks to SA inflation are weighted to the upside, but then revise down their inflation forecast for 2023.
 
It is also odd that the MPC changed their risk assessment of SA’s economic growth. Back in July, the MPC highlighted that the “risks to SA growth are weighted to the downside”. However, in the latest MPC statement the risks to SA economic growth have been revised to “neutral”, yet SA is experiencing stage 5/6 electricity outages, interest rates have risen further and global growth has weakened. This would suggest that the bank is being too complacent regarding the negative impact of aggressive rate increases on the performance of the SA economy. It is also likely that the MPC has become more beholding to global interest rate developments than the MPC statement would suggest and that “protecting the Rand” is a critical factor in the setting of SA interest rates. The Reserve Bank’s SA GDP growth estimate for 2022 was revised down slightly to 1.9% from 2.0%, while their 2023 estimate was increased fractionally from 1.3% to 1.4%. For 2024, SA GDP growth is forecast at a still modest 1.7%, up from 1.5% previously.
 
Overall, the latest interest rate decision needs to be viewed within a global interest rate context. It can be argued that SA should not increase interest rates aggressively considering the current weak economic environment, high food and fuel prices (which are difficult for most households to avoid), high unemployment and service delivery constraints. However, the Reserve Bank has repeatedly highlighted their desire to ensure that SA inflation is anchored around the mid-point of the inflation target, and noted that allowing SA inflation to remain above the inflation target unchallenged is unacceptable and would undermine the recent gains in getting inflation expectations lower. Without rate hikes, SA has a high risk of quickly developing a self-reinforcing upward spiral in inflation, driven by wage demands and a weaker exchange rate.
 
At this stage it seems reasonable to assume that the Reserve Bank is likely to continue to hike rates during the remainder of 2022 (final MPC meeting on the year is scheduled for 24 November 2024) and into early 2023. However, is also seems fair to assume that once inflationary pressures have abated more convincingly, the bank will want to pause and more clearly assess the need for any further rate hikes – especially if SA’s inflation rate is heading towards 4.5% at the end of 2023 and other major central banks are also looking to end their own rate hiking cycle.

Stay Savvy,

 Jacques