Morning Brief – How much?!

Morning Brief – How much?!

Thu 12 Sep 2019

How much?!


Outside my window in Johannesburg there is an electronic billboard that, when not tempting me with the nation’s latest trendy tipple, displays an advert claiming South Africa’s best savings rate. On a 60-month fixed term the investment promises returns in excess of 13%. I haven’t been fortunate enough to catch the fine print written obscurely at the bottom but, with compound interest over a 5 year period it’s reasonable to assume this is an average annual return perhaps with a slither of dodgy accounting practice. Before you send money flying over to take advantage of this interest, remember: with great power comes great responsibility! By the way, I was more enthusiastic about this quotation before I googled it and found it’d been lodged in my memory by Spider-Man… 



Mastermind rules:


I’ve started so I’ll finish. The great power behind savings and yield accumulation in South Africa has a corollary: an overwhelming responsibility to repay debt with interest (including interest upon interest ad infinitum) appropriate to the borrowing rate in the economy. As is often the case in developing markets, the latter responsibility is not upheld, creating a lack of demand for the former (deposit) side resulting in a shallow and unbalanced domestic debt market. Sub-Saharan Africa’s most significant economy this morning has captured international financial headlines as it does battle with this issue.


A report from a company called Differential Capital has warned today that 40% of domestic borrowers in South Africa are in default, leaving millions of people in a debt trap. The money borrowed amounts to a collective 225 billion Rand across 7.8 million people (in SA’s 60-million strong population). The debt (just shy of R29,000/capita) is dangerous given that it is un-collateralised. Allowances for these unsecured loans were increased in 2007 to boost domestic activity in a time of global turndown. However, with debt centre stage as South Africa remains at the mercy of Moody’s credit rating advice, the accumulation of debt has the potential to wreak havoc.





Yesterday, South Africa’s daily business newspaper proudly claimed that Moody’s had confirmed it won’t downgrade its debt from its present rating of Baa3, the final rating before the asset becomes classed as junk. Good effort, but that’s not exactly what they said! Poetic licence translated the statement that it’s unusual for the agency to downgrade debt a whole rung on the ladder without first giving it a negative outlook (that it doesn’t presently have) into the certainty of maintaining investment grade for a year to a year and a half (maths made up according to South Africa’s bi-annual debt review schedule).


However, particularly in light of the issues with domestic unsecured debt making headlines this morning, South Africa does stand at a precipice with the potential for financial turmoil and, unsurprisingly, currency turmoil. The market knows it already. Credit default swaps (as mentioned in this briefing before and by Margot Robbie in a bathtub) are a way of pricing the risk of a financial instrument and helpfully allow us to rank the market-perceived credit worthiness of each nation.


In South Africa the insurance against default on sovereign debt over a five year time horizon is twice as expensive as it is regarding Brazilian sovereign debt, a nation which is rated as Junk already (two whole steps behind South Africa). The market is screaming warning signs and it is inhibiting the Rand. The confirmation of Junk status by Moody’s in the coming months (heads up for its first ratings decision this year anticipated on 1st November) will see the Rand tumble below the levels that debt markets currently price the nation.


If that all wasn’t enough, today the European Central Bank will deliver their monetary policy decision. Markets are pricing in rate cuts and anticipate the reintroduction of Outright Monetary Transaction spending plans and strong forward guidance. The event should mark a period of heightened volatility and, as ever, bargains will be on offer when markets function more erratically. The salience of this decision has been heightened even further by a dispute yesterday from Dutch authorities over the nature of tiered interest rates.




Discussion and Analysis by Charles Porter

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