The affirmation of South Africa’s investment-grade credit rating by Moody’s late on Friday is welcome. South Africans will now be spurred to focus on their individual financial wellbeing and ask if their own status could be described as investment grade or junk. This in light of the fact that 94% of South Africans still on the junk watchlist.
The international ratings agency also revised its credit outlook to stable from negative, saying the previous weakening of national institutions was gradually reversing, which supported an economic recovery.
Clearly before Cyril Ramaphosa became the president ratings agencies unequivocally were saying South Africa was on the wrong path.
They were saying the behaviours and the policies were leading to poor outcomes and our credit standing in the global investment community was falling all the time.
A statement from the Treasury said the Moody’s decision showed that the progress being made in meeting the objectives set out in President Ramaphosa’s State of the Nation address was key for the country’s economic and fiscal prospects.
‘To improve South Africa’s investment and economic prospects, the government continues to work diligently on practical steps to provide the necessary policy certainty,’ the statement said.
However the sad reality for South Africans is that 94% of them actually are in junk status.
The statistics over the last 25 years that have shown that no more than 6% of South Africans can afford to retire. There is no other way to describe that than as a failure or junk status.
The global rating agencies evaluated the future health of the country’s finances, not just what the picture looked like today.
They are looking at what they think the picture will look like into the future. They are looking at whether the country’s policies and way of operating is likely to lead to good, neutral or poor outcomes. This could be applied to individual’s financial wellbeing too.
What we need to focus on as individuals is what is the outlook for our own financial wellbeing.
We don’t need ratings agencies to forecast this for us; we can forecast it for ourselves and see what the outlook for our retirement is. We must ask ourselves if our retirement is an investment grade retirement or if it is a junk status retirement.
A cut to junk by Moody’s, the last of the three international agencies that still has South Africa’s local currency debt on an investment grade rating, would have had dire consequences for the country.
South African bonds are part of a number of bond indexes that are tracked by lots of funds. A critical one of these is the CitiGroup Inc. World Government Bond Index. If South Africa had lost its investment grade rating from Moody’s, the country would have been expelled from the WGBI, and all those holders would have had to sell the bonds.
Estimates were outflows of as much as $10 billion. That would have put pressure on the rand and on bond yields (and, hence, on the government’s borrowing costs).
The concern is that the less creditworthy South Africa is the more expensive it becomes for us to borrow and that means that a larger chunk of government expenditure goes to paying debt.
That means it is being used unproductively and that becomes a negative spiral.
Announcing its widely expected decision to hold the investment grade rating, Moody’s said on Friday the previous weakening of state institutions was gradually reversing, supporting economic recovery.
Thankfully with Ramaphosa’s appointment as president and the policies we have seen so far, with Cabinet reshuffles and improvements in some of the boards of state-owned enterprises, the picture has changed dramatically.
The finances of the country to a large degree are built up by the finances of individuals, the aggregate finances of companies and the finances of government. Clearly, government has done a bad job over the last couple of years, with large deficits and with wasteful expenditure.
Things are much more positive and the country had moved from a negative path to a ‘more neutral path’, but there was still a long way to go.
It is positive relative to where we have come from but, in absolute terms, there are still lots of challenges as a country and for individuals.
We should look at how we can improve our own status and hopefully get an upgrade in our retirement outlook, hopefully even an upgrade to investment grade.
What this means is one must take charge, make some decisions, some of them will be quite easy; others more difficult.
A really easy decision is to ask: Am I invested in the right portfolio, am I invested in the portfolio that is likely to give me the best growth?
Most people had no idea where their money was invested. If they were to look most would see that their money is invested in an actively managed fund and most active managers do worse than an index.
By investigating where their money was invested they could make some really easy and painless decisions to upgrade their retirement significantly. All it takes is a phone call and filling in some paperwork to get a much better deal for yourself.
Individuals also need to make sure they are saving enough.
Optimally you should be saving 15% of your salary. If you are below 15%, you should try look at how you can get there. That is where it is a bit more difficult because we have to trade off some of the things we want to do today.
Fees are another area where people could make a small, painless decision for a large benefit. Investors need to find out what the total cost of investing is, although that is not always that easy because in SA the industry is opaque.
You have to be persistent, but it can be done, and companies like ours and others are helping people to get to the bottom of the fee structure.
Be sure to understand the total cost of investing, what am I paying my advisor, my platform, what are the expense ratios in my fund. The average South African is paying 3% and they should be paying 1% or less.
If you can save 2% [of the total value of your savings] in fees over the next 10, 20, 30 years that will have a dramatically positive impact on the outlook for your retirement savings.
That is a sure way to upgrade the status of your retirement fund!