In the aftermath of South Africa’s downgrade to junk status by two major ratings agencies, it is feared that the country will begin a self-reinforcing downward spiral. Until the end of 2016, Azar Jammine, the director and chief economist of Econometrix, felt that the nation was experiencing a “slow erosion, not a huge slump.”
However, in an article published in October last year by the Mail & Guardian, Stanlib’s chief economist, Kevin Lings, warned that the country would be vulnerable if “the economy continues to deteriorate and confidence dissipates.”
He also emphasised that circumstances were ripe for businesses to need to do some real cost cutting in the form of retrenchments.
The widespread retrenchments that many feared would take place over the last couple of years never really happened. Although the trend has been towards the downside, the expected acceleration in retrenchments in the manufacturing, mining and construction sectors didn’t happen last year.
This is believed by Lings to be because the companies that made huge job cuts during the 2008-2009 financial crisis didn’t really add those jobs back. He explains that many companies in the formal sector “have been incredibly reticent in adding more jobs. So now, when you get a downturn, businesses don’t have the excesses they had in the past. There’s little to trim.”
So although the last decade has witnessed “the beginning of a new normal” in which there have been some preliminary indicators of financial distress, Lings explained at the end of 2016 that “when we look at South Africa, what we see so far is that the environment is rich for distress but it is yet to show up.”
Statistics show that there most certainly was a decline in the sale of household goods and vehicles, but the “tightening of regulations and the implementation of affordability testing and debt counselling are thought to have had a positive effect” on deterring unsecured lending, which is a key indicator of when people are under stress.
Now, however, as a result of the combined factors of the drought, the corrupt political situation, and the downgraded economy, South Africans wait with baited breath for what will happen next. The Rand, at around 12.90 to the dollar towards the end of April 2017, remains weak.
It is important at a time like this to understand the implications of recent events. Don’t be distressed, refrain from making impulsive decisions – let’s arrange a chat to find out what the future may hold for your personal investment portfolio.
