Is South Africa becoming Zimbabwe?

“Is South Africa becoming Zimbabwe?” Is a question we are all too familiar with in South Africa. However, I am writing that on behalf of UK citizens this time.

The Bank of England recently announced that they will directly fund (print money) for the UK government’s spending needs on a “temporary” basis. While these measures will likely have a more long term effect on the value of currency, if they become permanent, investors should be made aware of the risks that these measures pose and be reminded that we are living in unusual times where governments and central banks around the world are doing everything in their power to keep the economies and stock markets from falling.

Central banks and governments in developed economies believe that they can easily get away with money printing – and to some extent they can for long periods of time…

While many South African citizens and investors are in a state of panic about our local currency they should take heart in the fact that it appears that the Reserve Bank of South Africa is all too aware of what happened North of our border and the risks that would be posed to our currency by adopting a program such as the Bank of England has announced.

South African Reserve Bank Governor Lesetja Kganyago has recently confirmed that we will not be conducting any ‘money printing’ as a means to finance our government. Kganyago said, “Understand that the banknotes and coins you have in your pocket are but a piece of paper or a piece of metal.” The only thing that gave them value was the presence of a central bank that was willing to stand behind them and protect their future buying power, Kganyago said. “Put simply, the mandate of the Reserve Bank is to contain inflation, and measures such as deficit financing through the printing of money are not in accordance with what the Bank is tasked to do.”

Kganyago understands the basic laws of economics and sound monetary policy. Let’s hope the governor of the Bank of England understands that too.

Although the rand can certainly weaken further – if you have not already moved money offshore prior to the recent market carnage then I’m afraid the horse has bolted and there is just as much of an argument right now for being a patient ZAR investor and keeping your money in rands until a better opportunity to move money offshore arises.

The rand has moved from R14/USD to R19/USD in the space of a few months. Give the market time to digest that move and you may find the rand gaining ground again. Let us also not forget that the rand is not alone on this road. The Mexican Peso moved from $18.60/USD to just under $26/USD and Norwegian Krone 8.70kr/USD to above 12kr/USD over a similar time period to highlight just two of the many currencies being tested right now.

In closing, I wanted to share some quotes to ponder:

  • “…and we can guarantee cash benefits as far out and whatever size you like, but we cannot guarantee their purchasing power.” Alan Greenspan. USA Federal Reserve Chair from 1987-2006.
  • “I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.” Richard Nixon 1971. (USA President announcing the end of the gold standard.)

Note that the ‘temporary’ government action mentioned by Nixon in 1971 has now lasted 49 years!

Let us be vigilant in guarding against central banks’ “temporary” actions becoming permanent – even against the most powerful central banks in the world that currently have the most capability to print money at will.

Like many South Africans, you may be faced with more questions than answers at this unprecedented moment in history. Whilst we may not have all the answers, myself and our team of financial advisors at Reid Raetzer Robsons have decades of experience in managing the investment portfolios of our clients through ‘thick and thin’ ensuring that their funds are not only secured but yielding returns regardless of economic climates or crises – this is possible because there is always AT LEAST one asset or asset class rising if others are falling. Let us assist you with those asset allocations! Click here for assistance from our RRR Team.

 

About the Author

Wesley Moodie is a Financial Advisor at Reid Raetzer Robsons and holds the Chartered Alternative Investments Analyst designation. In his former life he was a professional tennis player ranked in the top 100 in the world in singles and top 10 in the world in doubles. He can be contacted by clicking here: WESLEYM@RRIB.CO.ZA