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South Africa's Credit Rating at Risk

South Africa's credit rating was downgraded - how to invest elsewhere

Rocky start for South Africa’s economy

The new year hasn’t started well for South Africa’s economy at all. Within the first few months, the IMF has slashed its growth forecast for 2020 and 2021 to 0.8% and 1% respectively. But could investing in UK property be a possible solution in this uncertain world?

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Moody’s is about to review its assessment of South Africa’s investment grade rating. It will review Finance Minister Tito Mboweni’s Budget announcement and assess whether it is satisfied with plans to rein in the country’s ballooning debt. Earlier in February Moody’s downgraded its economic growth forecast for South Africa to 0.7% citing a lacklustre domestic demand fueled by power outages that has affected its manufacturing and mining industry.

Whilst Moody’s have said that the downgrading is a possibility but not a certainty and that any decision could be postponed until October 2020, the market is already pricing South African debt as sub-investment grade. Moody’s next reviews of the country’s ratings are on March 27 and November 20.

Junk status would mean that South Africa is not actually trusted to repay its debts. This in turn means that European and American fund managers will put their money elsewhere and it is predicted that South Africa will lose immediately about R150bn outflows. This will be detrimental for the future growth plans and slow any possible economic recovery.

What if South Africa’s credit rating is downgraded?

Moody’s is the only credit rating company that still has an investment grade rating for South Africa. If it rescinds the rating, then South Africa will be ejected from the World Government Bond Index. The downgrading could cause a big sell off in South African bonds and the rand as certain types of investors mandated only to buy high-grade debt are forced to sell.

If South Africa’s credit rating is downgraded, it will have a negative effect on the currency. The rand will be worth even less against other stronger performing currencies such as the pound and the euro. People with savings may find the value plummet overnight making it difficult to move the money elsewhere, and those looking at going overseas may find it more expensive to do so.

The budget deficit is expected to grow to R370.5 billion (2019/20 originally at R243 billion) or 6.8% of GDP. Gross national debt will reach R3.56 trillion, amounting to 65.6% as a share of GDP by the end of 2020/21. Where a budget deficit is more than 6% – alarm bells are raised for lenders – it indicates that there is a high risk that the South African government may not be able to repay international loans. Lenders not only increase interest rates but the loans become denominated in foreign currency such as the USD. The implications are dramatic because the South African Rand is falling in relative value to the currencies in which the loans are offered. Thereby making the debt balloon in real terms.

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Capital Flight

South African investors would have done well to invest in overseas shares. The S&P comfortably outperformed the JSE. However, South Africa’s pension and investment industry is controlled by Regulation 28 of the Pensions Act which limits the percentage exposure funds to only 30% to offshore funds. Thereby making most South African pension funds underperforming to Global Index trackers while still charging high fees.

Due to the fall in demand, as a result of the Corona Virus, company earnings will fall. Stock market have dropped more than thirty per cent 30% and many company dividends have been suspended for the near distant future.

Possible solutions in an uncertain world

One action South Africans can take to safeguard the value of their savings is by investing overseas before a decision has been made on South Africa’s credit rating. The UK property market performs consistently well and the pound performs strongly against other currencies. According to the UK House Price Index, average property prices in the UK rose by 2.2% in the year to December. Since the Conservatives won a majority in December 2019 house prices have been rising more rapidly as confidence in the market has been restored.

South Africans can invest in UK property in a number of ways. For cash buyers, commercial property such as care home investments tend to work well as they offer guaranteed rental returns and buy back options. They are also run by a management company who would oversee the day-to-day management of the unit, so it is completely hands-off for the investor.

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Care home suites in Duchess Gardens in West Yorkshire start from R1.3m and guarantee a 9% return for 22 years and four assured exit strategies. According to the Centre for Ageing Better the number of people aged 65 or over is expected to increase by 40% over the next 20 years, so there will be sustained demand.

The UK student market has continued to flourish; 2019 was the second busiest year with the volume of investment transactions reaching 5.3 billion British pounds. Student property investments are categorised as commercial investments, and therefore exempt of (transfer) stamp duty under (150,000 GBP) R3.04m. Meaning that the circa 8% returns are achievable after purchase costs.

The UK has world class universities that continue to attract non-resident students; Sheffield student property investments will capture the robust demand with over 7400 international students. The fundamentals of the UK student property market 2020 are looking positive with the re-introduction of two-year post-study work visas. Student applications from India have increased by 45% since the announcement. The UK government is aiming to attract 600,000 international students by 2030.

At One Touch Property we have UK student property investment opportunities in cities with prestigious universities such as Lancaster and Sheffield. Investors can purchase an en-suite in central Sheffield for R1.31m. The development is a ten-minute walk away from the University of Sheffield and boasts excellent security and modern technology features. An 8% annual return is contracted for five years and the apartment will be fully-managed by a local management company.

If South Africa’s credit rating is downgraded, there are steps South Africans can take to ensure it will not affect their savings. Investment property is one of those options. Seeking rand-hedge options and having income in another currency will better equip South Africans against possible turmoil. Contact One Touch Property today to learn about UK property investment.

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