Ramaphoria vs Ramareality

by | Jul 3, 2018

So, what has happened since Cyril Ramaphosa was sworn in as the President of South Africa?

The biggest positive impact has been an uptick in confidence. It is critical that “Ramaphoria” is sustained and Ramaphobia (the fear that Ramaphosa cannot save the country) does not gain a foothold.

Topmost of the confidence-building measures has been the rapid replacement of the leadership of state-owned companies. It was vital that this was addressed early on as this is where most of the risk within the economy and the rot, has centered.

Also, part of the confidence-building measures that have been put in place has been the appointment of a strong, independent economic adviser, several special economic envoys, and the announcement of investment target and summits, specifically targeting job creation and foreign direct investment within South Africa.
Ramaphosa has good intentions, but investors, rating agencies and business are looking for structural reforms that will remove barriers to growth.

Unfortunately, Cyril is fighting on 4 fronts:
1. He must consolidate his position within the ANC, as his enemies attempt to weaken his position;
2. He must breathe life into a damaged state that has lost the will and capacity to deliver effectively;
3. He must persuade a jaded electorate to back his party; and
4. He must win over investors to turn a moribund economy around.

Bad Moon Rising …

Knowing what to do is one thing but having the courage and support to do it is something much more complicated. It is evident that the ruling ANC party has embarked on a policy path of radical populism in order to stay in power come next year’s national elections. It has stolen radical ideas from the EFF, leaving Julius Malema with only pure unadulterated racism towards all non-blacks as his only source of political oxygen.

Until recently, the relatively dormant policy of radical economic transformation has suddenly been resuscitated and injected with a new sense of urgency.

To date, we have had:
• Free tertiary education for people earning a certain minimum salary.
• The planned expropriation of land without compensation.
• The introduction of minimum wages.
• The wages and salaries of Government employees – after a short but cowardly showdown with the unions, we have seen increases that were unplanned for, leaving an unbudgeted R30 billion shortfall in the budget.
• Government recently caved in to the radical demands of militant labor unions at Eskom with Minister in Charge, Pravin Gordhan, scrapping the previously announced zero-increase for the bankrupt monopolist supplier of electricity to around 9%. This at a time when inflation is below 5% and with wages at Eskom much higher than in the private sector.
• The introduction of the long-threatened national health insurance scheme (NHI) which, together with proposed changes to medical aids, will radically overhaul and possibly destroy one of the few remaining policies of excellence we still have left in SA.

The issue of land expropriation without compensation, if handled poorly, could pose significant economic risk to the country. Despite assurance by President Ramaphosa that it will not affect the economy, Ramaphoria has quickly started to fade into “Ramareality” which is evident by the sharp -2.2% decline GDP in the first quarter of 2018, a decline in the current account deficit to 4.8%, and the drop in the Rand by approximately 20% year to date, while the JSE remains one of the worst performing stock markets in the world so far this year.

Residential property has gone from bad to terrible. Properties are slow to sell and often battle to match the purchase price years later. The balance sheets of millions of middle to upper property owners are being devastated by this slowly unfolding financial disaster.
At the same time, approximately 4,000,000 people have immigrated to South Africa, mostly from Mozambique, Zimbabwe, Malawi, Kenya and the DRC, mostly in search of a better life, but unfortunately in most cases brining only limited skills.

The introduction of the NHI is just another tax burden to be added to the already crushing tax burden on ordinary South Africans. South Africa’s tax base is already very small, with only 102,000 tax payers paying almost 60% of all personal income taxes!

Any serious attempts to push through land reform – which entails the confiscation of commercially valuable land from persons, companies, or trusts – will have serious knock on effects with the Western world placing great emphasis on property rights, land reform and their potential impact on property values. What would likely follow is a steady decline of the Rand, the JSE and the state of the country.

If Government takes the populist route in expropriating your property without compensation and dismantling your current entitlement to world-class medical care, how long will it be before it realises that too much money is leaving the country and cancels your foreign investments.

In closing, there are many positives since Cyril came into power, but there are many red flags which are very concerning.

Looking at the accompanying graph of the Rand versus the Dollar (attached), you will see that the Rand has fallen 14.39% in the past 3 months, but more concerning is that our currency has lost 1,811% against the Dollar since 1971, a frightening annualized loss of 6.43% over the past 47 years and the truly scary part is that this trend is expected to continue given inflation differentials, let alone all the other headwinds SA faces.

An ostrich, head in the ground approach, is not an
investment option anymore.One’s total investment portfolio should hold anywhere between 30% – 50% offshore, so take the time to re-evaluate your position.

Offshore investments can be accessed from as little as R500 per month to as much as R1 million per annum, without tax clearance and more with tax approval.