Decision Making Process

Zuma made a cabinet reshuffle without the approval of the senior party members. The treasurer of the ANC, Zweli Mkhize, said “unlike previous consultations which take place with senior officials of the ANC during such appointments and changes to the composition of the national executive, the briefing by the president left a distinct impression that the ANC is no longer the centre and thus depriving the leadership collective of its responsibility to advise politically on executive matters”.

Brexit is the will of the people. A referendum was held and 51% of participating voters chose to leave the EU. A high court decision was made that Brexit (Article 50) could not be triggered by the Prime Minister without the approval of the parliament. After a historic 17-hour debate the public’s representatives, ministers of parliament, overwhelming voted (498 – 114) in favour of article 50 being triggered. This democratic process followed two stages of approval before being actioned.

Zuma’s decision is one of self-interest and to the detriment of South African citizens.

Zuma has already shown his propensity to ignore the will of the people. While some South African children do not have chairs to sit on in class, he has spent £11m of government funds to upgrade his private residence with a swimming pool and amphitheatre. The Treasury has awarded Zuma’s nephew’s company R50 billion tender for the contract in a controversial Russian nuclear power station project. This is further evidence for the reason for finance minister, Pravin Gordhan’s, dismissal and Zuma’s blatant treasury raid.

The main reasons for Brexit were Britain’s autonomy to make its own laws regarding the control of immigration, free trade and the costly £3.5 billion annual contribution towards the EU.  The quickest realisation of these aims could be achieved with a ‘Hard Brexit’; the most drastic separation with the EU, however that could also have the most negative impact on the economy.

The Impact

 On credit ratings

Seventy per cent of South Africa’s debt is denominated in Rands. The downgrading to Junk status means that (SA) Sovereign bonds will attract a much higher interest rate. Investment funds would require the bonds to be denominated in foreign currency which compound the cost of the debt as the ZAR devalues.

Moody’s has warned that the U.K could be further downgraded if the country did not retain access to single market. Moody’s has given the UK an Aa1 rating, one notch below the coveted AAA rating. Standards & Poor as well as Fitch have maintained their AA rating for the U.K.

The cost of debt impacts everyone

Companies use debt to grow business and create more job opportunities. South Africa’s unemployment rate shows no signs of improving.

Unemployment rate                         

South Africa                            27.1%              (Nov16)

United Kingdom                     4.7%                (Jan17)

The UK unemployment rate is the lowest it has been for 11 years according to (ONS)

Lending                                               Repo Rate                   Typical Mortgage Rate*

South Africa                            7%                               9%

United Kingdom                     0.25%                          2.9%

The cost of bond finance impacts on housing affordability and growth. Where individuals are cost of living is increasing due to inflation and their wages are maintaining the same growth, their affordability is stretched.  Lower bonds (mortgage) rates make the monthly payment more affordable, thereby increasing the chances of capital growth on property prices.

Inflation

Both the UK and South Africa are experiencing inflationary pressures on the cost of the average basket of goods due to the currency devaluations.

The South African government secretly sold off its oil reserves in Sept 2016. The inflationary pressure is compounded because the fuel will have to be purchased at higher prices with the Rand falling. All consumer goods are transported and rising fuel prices will impact everyone’s lives as the cost of living increases.

In real terms, the projection for the GBP is that there will continued be volatility throughout the Brexit negotiations. The UK is the EU’s biggest customer and has successfully negotiated ZERO per cent trade tariffs with Canada. The World Trade Organisation is targeting tariffs of only 2% and the EU demanding more from the UK is highly improbable.

The medium term fluctuations have a silver lining in that London is a global financial capital and the leading centre for FinTech firms. Facebook will employ 500 new staff in 2017 at its new London office, Google to open new UK offices will create 3000 new jobs by 2020, Amazon has taken a 20 year lease of 417,000 sq/ft office space in ‘The City’ of London. Good trade and improved productivity, leads to currency appreciation.

House Prices

The figure of 5.5 million registered tax payers is often banded about; some believe that it is a lot less. It is a fact that business owners and skilled workers contribute a higher taxes and there is evidence to support that almost 40,000 high net worth South Africans have emigrated since 2014. The reason they say that South Africa’s largest export is rich people, is because the top 100,000 contribute 62% of all taxes. The political uncertainty and concerns for personal safety are often given as the main reasons for emigrating. Where the top tax payers are leaving the country it places increasing pressure on those that remain. Net migration also has an impact on property prices as the forces of supply and demand come into play.

One of the main reasons for choosing Brexit is to control inward migration. In recent years, the UK has had a Net inward migration of between 250,000 and 300,000 per annum. Coupled with a growing birth rate has seen population growth of 500,000 per annum. When one considers that the number of new home being built in the UK is barely reaching 150,000, it is easy to see why house price growth has continued unabated.

Manchester buy-to-let property has increased in value by 22% over the past two years according to LendInvest. The stellar growth is attributed to the highest number of people aged 25-29 living in the city. Job creation, affordable living (relative to London) and an abundance of leisure and cultural activities is appealing for the tenants. This bodes well for rental and capital growth to continue.

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