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How to stop your Rand savings from becoming junk

By , CFA Charterholder and CEO of investment platform Revix
South Africa , 14 May 2020
Sean Sanders, CFA Charterholder and CEO of investment platform Revix.
Sean Sanders, CFA Charterholder and CEO of investment platform Revix.

The Rand has lost over 40% of its value to the US dollar since this time last year and is down about 60% to the greenback over the last decade.

Globally, it has been the worst-performing currency of the 12 months. If you factor in the inflation rate of South Africa relative to the USA over the last 10-years, the picture gets even worse, with 90% of the rands ‘real’ value lost to the US dollar (SA inflation has averaged 4.4% according to the SARB while the Federal Reserve reports an average US inflation rate of 1.8%. This 2.6% difference in inflation means the ‘real’ value lost by the rand is 90%, relative to the dollar).

In other words, for every rand-denominated investment you own, it would need to have returned at least +90% in the last 10 years just to hold real value in dollar terms.

To make matters worse, both Fitch and Moody’s Investors Service recently cut South Africa’s credit rating. All three major ratings agencies now deem South African debt to be junk status, with Fitch having the most pessimistic outlook with a rating two notches below junk status.

Simply put, each of the top rating agency’s - Moodys, S&P and Fitch - now assesses South Africa to be a higher risk borrower with an increased chance that it will default on its debt obligations. Collectively these agencies estimate that South Africa’s debt burden will reach about 91% of GDP by 2023, up from 69% today.

A nationwide lockdown together with “[An] unreliable electricity supply, persistent weak business confidence and investment as well as long-standing structural labour market issues continue to constrain South Africa’s economic growth. Moody’s said. “As a result, South Africa is entering a period of much lower global growth in an economically vulnerable position.”

The Treasury responded by saying “The decision by Moody’s could not have come at a worse time…” The lockdown meant the budget shortfall and the government’s financial position will likely deteriorate further. Even before the lockdown, it was forecast that South Africa’s 2020 GDP would contract for the first time since 2009 primarily due to an unreliable electricity supply and heavily indebted and unprofitable state owned enterprises: Eskom and SAA.

So what are South African investors to do?

South African consumers should be protecting their wealth by holding alternative assets including US dollars, gold and cryptocurrencies.

The US dollar is the world’s most transacted currency and generally appreciates relative to other currencies when global risk levels increase. The dilemma for emerging market central banks is that as they slash interest rates to support growth, they risk destabilising their currencies if they cut too much. This exacerbates risk and leads to further outflows of emerging market currencies which have already exceeded $50bn since the start of the outbreak.

Gold acts as a safety net in terms of economic uncertainty, it is a rand hedge, and most of the time its value moves inversely to risky assets like stocks. Gold also acts as a hedge against inflation and has a limited supply, so unlike central banks who are printing money at unprecedented levels, gold's supply remains steady.

Cryptocurrencies are a volatile and nascent asset class, however, the fundamentals driving cryptocurrency adoption have been strengthening. Central banks around the world are printing money at unprecedented levels, the financial system is under immense strain and globally emerging market currencies have lost significant value. This combination of factors increases the appeal of non-sovereign digital currencies which have a fixed supply and are viewed as a modern alternative to traditional financial systems.

These are uncertain times. The coronavirus pandemic is far from over, jobless claims have soared and now South Africa will have higher borrowing costs thanks to the rating downgrades.

What is USD Coin?

USD Coin, or USDC, is a crypto asset with a stable price - otherwise known as a stablecoin - which is backed 1-to-1 by US dollars held in reserve by regulated financial institutions. Every token can be redeemed for one dollar - providing a dollar-linked stable investment. USDC is unique relative to the USD for two reasons. Firstly, USDC can be transferred peer-to-peer (P2P) without the need for any bank or financial intermediary and secondly it can be bought and sold at any time while USD can only be traded during the week.

What is PAX Gold?

PAX Gold (PAXG) is a digital asset where one token represents one fine troy ounce of a London Good Delivery gold bar, stored in professional vaults in London. Anyone who owns PAX Gold owns the underlying gold which is held under the custody of Paxos Trust Company. The value of PAX Gold therefore also tracks with the real-time market price of gold.

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