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Right now, we’re looking like an eighties rerun

Economic and political indicators point to a serious case of déjà vu.

It is a well-known fact that government’s debt-to-GDP ratio is going to be around 56% by the end of March 2019. Debt from state-owned enterprises (SOEs) is likely to add another 35% by the end of the month.

Total public debt issued is therefore likely to be 91.5% by end March. This is the highest level the total public debt-to-GDP ratio has ever been.

The last time South Africa had similar debt levels was in the middle of the 1980s, and it was very difficult to finance that amount of debt. Government was on the verge of defaulting and was looking at ways to re-enter the world with the then prime minister failing to cross the Rubicon in a speech a few quarters later.

South Africa made use of financial experts in Switzerland to find money on a daily basis as sanctions hurt. Sanctions by overseas pension funds, and later banks, made it more difficult to pay the interest which peaked north of 18% in January 1986.

Moreover, South Africa in the 1980s had prescribed assets, which meant that 53% of one’s pension had to be invested in government and SOE bonds. This was done so that the government had access to money for the debt repayments it had to make.

Although interest rates rose, this did not completely compensate for all the risks such as inflation and a possible default by government. 

The situation got so out of hand that when a person in New York wanted to know what the Swiss franc/dollar exchange rate was, they would phone the then Transnet dealers. Nedbank was at times rumoured to be the biggest Swiss franc/dollar trader in the world. Incredible for a relatively small South African bank in the 1980s.

Far away from the public eye however the Nats [National Party government] were talking to the ANC, while others went on Senegal safaris. Namibia gained independence and the SA National Defence Force withdrew from the then South West Africa.

Iscor was en route to being privatised as the socialist Nats needed cash – although it took another five years before it happened in 1989. Lux Air brought competition on some European air routes against SAA. Private airline Flitestar could operate domestically as SAA didn’t have the cash for more planes.

M-Net was allowed to compete against the SABC and Sunday trading started, all to get the economy going.

In 1990 Nelson Mandela was released and the ANC was unbanned by FW de Klerk. Before him, however, PW Botha and the justice minister were already in talks with Mandela. SA needed foreign funds and relief from the then lower, but still high, debt levels.

As SA had too many power stations it drew investment with very cheap electricity prices, never to be seen again. It attracted Alusaf and other big power users. This then brought the cheap power and the money to help pay off the Eskom debt at the time, while our railways made plans to export coal at a cheaper rate to generate revenue.

Now SA’s total debt burden is about 3% higher as a ratio of GDP and the country is heading to the same repayment concerns as then.

Today it is not financial sanctions but a rating downgrade that will get foreign capital to the local debt market. A downgrade due to the high public debt levels and low growth that SA has now reminds one of the 1980s.

SA’s current total debt-to-GDP ratio means that the country will struggle to finance the debt, much like during the 1980s, but without the excess electricity to sell – and with load shedding, which means the economy cannot function at its full potential.

A downgrade from Moody’s will increase the yields on bonds as foreign bond index funds and pension funds are forced to withdraw from the SA market, much like JP Morgan and CalPERS (the California Public Employees’ Retirement System) did in the 1980s.

Like a weapon of mass destruction this will blow up government’s ability to borrow more and, with tax rates higher than most countries, the impact on government’s ability to spend will be felt.

Soon the government will not be able to afford increases in social grants or the government wage bill, and the cohesion that government spending brings will dissipate.

Just like the 1980s, the economy will force a change upon South Africa. There will be selling of assets, pragmatic economic decisions and, I suspect, the socialist and racist rhetoric will almost disappear from government mumblings.

Bill Clinton said: “It’s the economy, stupid” during his election campaign against George Bush senior.

Well, economic reality is about to make a comeback in SA. Instead of wanting to know who won the elections, South African businesses will want to know what the outcome of the election means for the economy and how the politicians will react to the new economic reality.

Politicians will pray at the biggest altar of mass destruction ever – interest rates. They will pray for mercy at this altar, even if they have no religion or respect for markets. 

Expect unions to fight for pension fund returns when prescribed assets, in one form or another, are implemented. Our old age is under threat of poverty and relying on a social pension will not be good enough for the majority of South Africans.

Expect bumps and turns before a whole host of reforms are packaged and sold as new solutions to very old problems. Expect some universities to close, SOEs like SAA to disappear and many a government official to look for a new career.

The road to the future I describe will, however, be full of twists and turns and one must be careful not to panic. Save as you never have before, or more, because when you retire it will be harder. Diversify as fast and as much as possible but remember that you are now able to do more than before, and the politicians are about to dance to a new tune.

Mike Schüssler is chief economist at Economists.co.za.

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COMMENTS   55

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Had to check the name of the author twice. Sounded like a piece written by Magnus.

Haven’t heard from him in a while. I’m worried.

Dudley you made me laugh, it was exactly my response. Yes, I am worried too.

Magnus?

Don’t fear, he is alive and well and assisting a deluge of new clients wanting to move funds abroad – his negative reporting’s work well.

Who pays for advertising, if Moneyweb and others will run your scare stories free of charge?

He is a clever man – worth listening to.

Seems that Robert found something to do in Sydney or did someone confiscate his keyboard?

Tell Robert from Sydney, all is well in South Africa, we make money, lose money, we have very good weather, plenty of natural resources and a new president.

Noooo! I was very happy he has fallen silent, do not give him any ideas!

Don’t rattle his cage! Let sleeping ones lie.

Robert in Sydney was diagnosed with cancer

Great article – Mark Twain said history never repeats, but it rhymes very well. Yes indeed, save like never before and diversify is the only response most of us have available. I’m just not so sure that the socialist and racist rhetoric will dissipate. Zim has told us that politicians under pressure makes up better stories than science fiction writers

Indeed, as Mark Twain said “history never repeats itself”….but is countered by “generations of people do NOT LEARN from past mistakes”. World history confirms this.

The socialist and racist rhetoric will remain rhetoric (even though the masses will be open to the drivel). We know, however, that that is not what the current political elite believe or want. They are only interested in strengthening their own position of power, which will guarantee their position at the trough. They are, in fact, capitalists at heart, using what they have (political clout) to enrich themselves – unfortunately to the detriment of the country as a whole. For me, that is the big difference between the 1980’s and 2019. I’m not saying the the politicians of the 1980’s weren’t helping themselves as well, but surely it has completely gone off the rails with the current bunch.

Fail to see why this is such a great article. Mike is very vague and speculates a lot especially about the politicians -read ANC- changing and accepting a new reality. We all know this is not going to happen as demonstrated by the now failed state of Zim.

…2nd to last paragraph, last sentence will no doubt come with a cheer of a beer and vors roll

This is how the Bastiat, the French classical liberal theorist and political economist who lived shortly after the French Revolution, describes and predicts the situation in South Africa.

He referred to the effects of socialism in general, but in our case, it is valid for BEE, AA, Cadre Deployment, Social Grants, high personal tax rates, the disrespect for skilled individuals, the disregard for property rights and political opportunism.

“When misguided public opinion honours what is despicable and despises what is honourable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns it’s back on progress and can be restored only by the terrible lessons of catastrophe.” ― Frédéric Bastiat, Economic Harmonies

Excellent article Mike and one we should all take extremely seriously. My question is that if the govt cannot spot the already very obvious declining trend, how low will we have to go before they are shaken out of their socialist / Marxist stupor ? Is it even possible for them to do so ? It seems that the worse things get, the more they dig in with their rules and regulations, merely speeding up the process. People, companies and countries go broke slowly and then fast – we are speeding up which is not a good sign at all.

You can rephrase your questions as: What will it take for the ANC to stop stealing?

Everything.

Back o the 80’s hey, well that can’t be too bad actually, now that I see what the present is under Failure Inc headed up by Mr. Empty Suit himself.
Whatever happened to the old slogan anyway? Remember?…..”The future aint what it used to be”.

So the best case scenario is that things will hopefully get so bad that the ANC is forced to be pragmatic.

Heck I wonder about that. A turnaround means drop BEE, the mining charter, the minimum wage, slash the govt payrolls, exit SOE’s, import foreign skills and relax visa requirements.

The ideology of this government rules out everything we need to get onto a growth trajectory

Yes, that is the best case scenario, according to Mike.

The most likely outcome is that the ANC will intensify its destructive rule and drop below 50% in the next election.

They will then welcome back Julius Malema and his thugs with open arms.

Malema’s only condition will be the post of president for life.

This is why the author, RW Johnson is quite correct when in his book “How long will SA survive”, he states that SA can either choose to have a modern industrial economy of the ANC, but it cannot have both.

The only solution for South African is to be frugal… Don’t waste your hard earned money. No matter how little it is keep for yourself as much as you can. Jobs are no longer secure, so why go on 24 months contracts for cellphones, for pay TV, for gym memberships, why have multiple insurance covers… You are not thinking straight if you work 30 days every month only make big business rich, yet your family is suffering. Buy and acquire what you need, pay off all burdensome debt and cut down on luxuries that you have no time for enjoying.

I agree. Reduce one’s debt as far as one possible can, because one day when the Rand tanks, and interest rates shoot up….that luxury lifestyle of (most of us) S’Africans will bite us in the back. Then we will realise how much our lifestyle really costs…

And guys like Magashule and Mabuza is completely oblivious. They won’t have a clue what Mike tries to say.

Uys will say ‘what did anyone do wrong’?

More scary is that from Ramaphosa down they don’t care. These are not stupid people, uneducated and inexperienced sure but primarily just venal and self interested way above SA and its people. Note also that readers of Mike Schussler are generally “moderates” and rapidly being overtaken in number by the crooks and the radicals.

Exactly right, but Mike you have not compared the crime rate and social unrest of the two period’s bearing in mind that we still had a relatively good Defence and Police Force in those days. This has a direct bearing on the normal, everyday citizen’s ability and will to keep the country on a stable path!! I fear that the further rise in crime and social unrest will be the final undoing!!??

‘’In the end flat money returns to its inner value – Zero’’

Voltaire.

Mike- I have got a total different view on the Swiss Franc trading in those years. Only two names always really came up – Transnet (the dealer committed suicide many moons ago) and Nedbank. Ask any (mostly retired FX dealers from the eighties) what happened in those years, and they will confirm the absolute overtrading that went on, on a daily basis (with large CHF orders) that were left with the Bank.
I think, most of the money and advice that came in from the Swiss Banks, was done with in the form of Gold Swaps by the SARB. I also think that the SARB appointed James to conduct a commission of enquiry into the daily ‘’overtrading’’ in the USD/CHF market ex Johannesburg. This followed after the Fed called the SARB to enquire about Johannesburg Bank(s) trading in the New York market, late in the afternoons.

Nedbank also did plenty of trading through their London office – I think they liked to call it sanctions busting

In 1984 I was visiting Banks in London, Frankfurt and Zurich etc. Only one name came up – Nedbank London’s over trading in USD/DEM and USD /CHF.

I stood in the Green Bank’s dealing room in London – and I was shocked to see and hear the numbers etc. that were being traded, through Bierbahms Dusseldorf (German FX Brokers) – mostly with big German Banks like Deutschmark and Dresdner.

I visited both these German banks – and had in-house lunches with the heads of their Treasury. Both Banks heavily complained about the Green Bank (over trading) – and they wanted to know whether it was order driven – I informed them that Transnet gave massive order in USD/CHF, but not USD/DEM !
Luckily I bumped into the Chief Dealer of the Blue local Bank and he warned me that I must prepare myself to answers questions about overtrading by the Green Bank, as he just visited them that afternoon.

I agree 100%. The decision (like the Nata) is to reform and lose power or go the Zim route. IMHO yesterdays ANC list should leave no doubt about which option they will take

Ok, so if my pension is going to be subject to a prescribed asset policy, which will in all probability be an abysmal failure , what am I to do?

Try to cash out, bite the tax bullet and invest elsewhere? Has anyone crunched the numbers yet?

Don’t worry….your pension (or RA) fund will earn high interest (due to risk involved) in govt bonds. The maturing bonds will always pay out…thanks to the SA taxpayer.

OK, if you are in a pre-retirement stage still building up your fund value….(i) if you have a employer Pension of Provident type fund, next time you resign/change employment…you can pay the hefty tax on the whole fund value, and invest the after-tax proceeds directly offshore. (ii) if you’re invested in a Ret Annuity Fund policy, you cannot withdraw before 55-age. Post-55 age, you can decide to “retire”, but you’ll only have access to 1/3 (…the R500K tax-free part, if you haven’t already utilised it on past withdrawals)…BUT…the 2/3 “compulsory” annuity-income portion….that you will be stuck in SA (subject to prescribed assets or pilfering). Unless if you truly emigrate & go through the formal Financial Emigration process.

For those already in post-retirement, while receiving your monthly annuity income (from the “compulsory” 2/3 part), you can only move your free, discretionary fund out of SA (the 1st R1m p.a. do not need SARS tax clearance…a.k. the SARB’s Single Discretionary Allowance). Except if you formally Financially Emigrate, I understand the remaining fund value can be cashed out (subject to the same R25,000 exempt SARS table)

Financial Emigration (which is not always a requirement to become a “Tax Resident” of another country…a different concept) is necessary to move compulsory funds out of SA.
However, the investment decision (taking tax into account) is not that easy:
(A) Either your capital in your withdrawn compulsory (pension or RA or preserver fund) will take a serious tax-setback upon withdrawal…be prepared to sacrifice a quarter or a third of your capital due to tax!

(B) Or emigrate to become tax-resident in another country, but do not do the ‘financial emigration’ process….i.e. you retain your SA bank account open / you keep receiving your SA sourced pension-annuity income (which gets taxed in SA, and do not pay tax on it again abroad)…saving you tax now.

But the long-term tax consequences needs to be weighed up: either you take a huge tax knock (in A) on your compulsory retirement fund capital, and flee prescribed assets….or (B) avoid such huge tax cost, and keep the status quo….but one has NO IDEA how heavy income tax in SA may still become (due to state debts, etc), which you will pay for as you receive your SA-sourced annuity income.

(MP336 process, SARS Emigration tax clearance, pay your CGT exit t

I think this is an optimistic view. The pessimistic is that pension value in ZAR will go the way of pension value in $ Zim.

If you are ina living annuity you are at their (Govts) mercy.
You cant withdraw more than 17,5% p.a.
If you do tou will likely reach the Max Marginal tax rate , so are caught there as well.
You do however get to manage that remaining cash from Govt , but is it worth to price ?? To many yes . To many No . Your choice

It is time that for another “High Road – Low Road” Clem Sunter type scenario planning session for all the key decision makers in the country.

The country is directionless, despite the serious problems, as the ANC is still wrestling with itself.

No need for such scenario. If you read all the SA “road signs”, you WILL KNOW on which road SA is actually on 😉

(Jy het jouself die antwoord gegee in jou laaste sin.)

“Road signs” are aplenty. Ignoring infrastructure failures…just look at large well-known SA companies’ trajectory. Steinhoff gone (own goals admittedly), Group 5 gone, Aveng / EOH / Aspen / Tongaat / etc reduced to almost rubble the past few years. Add skills exodus of people…esp the past 2 years.

Is this an indication of a “High Road” scenario?? If still in doubt…turn your headlights on to main-beam….

The road ahead is clear as daylight, no headlights needed, it’s the Zimbabwe Road and we can clearly see where it will take us. Blinded by our obligatory optimism.

Despite everything the rand/sterling exchange rate in June 1984 was 1.75.

my first USD purchase was in 1982 at around ZAR 0.72 to the $, thats more than 100% depreciation in around 2 years, we survived, maybe there hope somewhere :-))

As Baron Rothschild once said “the time to buy is when there’s blood in the streets.” when the panic happens and prices down buying them at a cheaper price will what we shall be waiting for.

I have an archived copy of SARS’ Income Tax tables of 1980:

The maximum marginal tax rate was R30,000 p.a. (irrelevant today due to inflation, was a CEO-type salary back then)….but the scary part was the top-bracket rate of tax was 55%!!!!

(OK, fair enough, such tax would’ve bought you still quality state healthcare back in 1980….i.e. private med aid wasn’t necessary. So when one think today’s 45% marginal tax rate is lower than Apartheid-days…ADD your private med aid contrib to your monthly PAYE, and get a combined idea what tax rate are your really paying today!)

Disagree. The difference between 1980’s and now could not be starker.

Apartheid regime for all it’s failures understood capitalism, SOE management & privatization and the stranglehold international sanctions had so change was inevitable and they had to negotiate with Madiba/ANC for SA to survive.

Most of the ANC understands that business are purely an interim ATM that they can milk dry until they throw in the towel. Then they can get on with their Socialist revolution and level the playing fields so everyone is equally poor (radical economic transformation + EWC). They haven’t and won’t do what it takes for South Africa to survive. Having a voter base who laps up Marxist rhetoric and being uneducated makes it even easier.

As Chairman Mao said: “The revolution is not a dinner party… its an act of violence by which one class overthrows another.”

> Apartheid resulted in economic failure followed by need to compromise.
> The ANC drives economic failure as the legitimacy to allow for total economic reset. (that will result in catastrophe)

It actually doesn’t matter how much investment comes into SA if it is not efficiently channelled into areas of the economy which will be productive in respect of creating exportable goods and services and as an effect, more jobs.

For decades we have seen billions of Foreign Aid dollars enter the African economy only to disappear into the void, with nothing done to improve the actual economy but only to increase the wardrobes and imported handbags of the ANC elite.

Who do we vote for then?
Or let’s open a fin/econ/edu party
#tired

The best party to vote for, is to “vote with your feet” 😉

One’s time and energy will be better spent on researching other countries’ immigration requirements / work Visa requirements / or retirement Visa / financial emigration / expat websites, etc…instead of tirelessly looking for workable solutions for SA.

(…most MW-readers have provided great workable examples on countless articles, which I have compliments for, but one knows for the ruling party it won’t be politically palatable…so what’s the use of providing sound advice to find economic solutions, if it doesn’t sit with the majority??)
Path of least resistance = vote with feet (now or later)

stem met jou saam, dis tyd om te gaan. ek noem dit ‘n “strategic withdrawal”

The feet now are 68 years old and tired. With the rands that I have and my age, no country will now accept me. I now draw more than the required % from my annuity and save what ever I can in gold and silver. If ever inflation eats into my annuity I will be able to at least have a decent lunch from gold and silver sales.

What’s worse than rampant ANC corruption? Debt funded ANC corruption.

Dare we dream that they ANC may one day soon(?) turn away from its Soviet thinking pattern?

*lol* …your thoughts around the ANC and their Soviet ideals, made me recall the following:

I’ve read comments on the web recently, where one (American) commentator on You Tube recons our revolutionary “EFF” party has characteristic similarities to ISIS (or Boko Haram).

So there we have it: the EFF and BLF acts exactly like ISIS terrorists!

I don’t agree. Don’t save, but rather submerge yourself in as much debt as you can and use that capital to hedge against the rand. We are heading towards hyperinflation, which means both debt and savings will be eroded.

I have thought about this brave strategy but to buy foreign equities and currency and gold. My other investment is in the most likely member of my family to be able to emigrate.

In the 80’s we had:
1. Sanctions/Boycotts
2. Civil strife – “Make the country ungovernable”, “With our matches we shall rule”, “Liberation before education” etc.
3. Angola and South West Africa wars

Today we have:
1. No sanctions etc.
2. Minimal strife, but crime
3. No wars

But we have no electricity, bankruptcy in our midst, highest unemployment ever, faltering currency and clueless idiots running the show. It seems the old regime did actually know how to rule even during the worst of times so why is there no leadership now? Or is that apartheid’s fault as well?

The biggest difference (between today and the 80s) is that in the 80s there was a government that had some level of competence, today we have a government that has none.

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