Managing your money and finances in a sub-investment grade economy
In light of the recent local economy’s downgrade, finance expert Samke Mhlongo-Ngwenya gives invaluable advice on how to make your money work for you.
The month of April saw South Africa’s sovereign credit rating downgraded to sub-investment grade by ratings agencies Standard & Poor’s and Fitch. This sub-investment rating, or junk status as it is known colloquially, resulted in many South Africans going into a state of panic as evidenced by the nationwide public demonstrations following the ratings announcements.
There are several technicalities surrounding the current credit ratings that explain why the Rand has not depreciated as much as one would expect with a “full blown” junk status rating, or as much as it did with the removal of Finance Minister Nhlanhla Nene in December 2015. However, with South Africa being placed on negative watch by all three ratings agencies, it would be prudent for individuals to start making financial decisions that anticipate the full adverse effects that could result from us being in true junk status.
A typical junk status economy is subject to rising interest rates; rising inflation as food, petrol and electricity prices increase; increased unemployment as companies retrench and the retrenched struggle to find new employment as companies are not hiring; rising cost of imported goods due to a lower local currency; and decreasing government expenditure as tax revenues decline and the cost of borrowing increases. The golden investment principle to remember even in the face of such grim circumstances is that one should not panic. Instead, the following steps can be taken to minimize the adverse effects of a junk status economy, and create the necessary buffer to allow one to navigate the different financial permutations one could find themselves in:
- Increase cashflow capacity
The easiest way to increase cashflow capacity is to review current expenditure and take up more affordable options that still meet your changing needs. An example is a review of your current medical aid and insurance plans.
- Stress-test your finances for changing interest-rate levels
One way to stress-test your finances is to set your prime-linked instalments at 1% higher than the current interest rate and assess how your cashflow and lifestyle are impacted. Conducting this exercise ahead of time allows one to make the necessary lifestyle adjustments without risking default. If your outflows still exceed your inflows even after stripping out luxuries and minimizing optional expenses, then approach your financial services provider in advance to discuss available options.
- Create an additional income stream
There are simple ways of supplementing your income such as taking up a board position, selling your skills on a consultancy basis after-hours, or embarking on a capital-light entrepreneurial venture. This may seem counter-intuitive but a junk status economy does present opportunities that can be leveraged for personal gain.
- Rand-hedge your investments
One of the major knocks that personal wealth takes in a junk status economy is brought about by the depreciation of the local currency. Investors can take proactive steps to build in a Rand-hedge into their investment portfolio and this can be done without necessarily transferring monies out the country. Some options include buying shares in companies that have foreign revenues, or in companies that trade commodities that are foreign currency denominated, or buying Gold ETFs. It is strongly suggested that this is done with the assistance of an investment professional to avoid risking losses.
- Have 9-12m salary equivalent available (outside of your pension)
Financial advisors typically advocate that one should have access to cash that is your 6-month salary equivalent. I would advocate that this provision be increased to at least 9-12months’ salary equivalent (excluding the proceeds of your pension) in an economy that is retrenching. There are a number of options in which this funding can be made available by a finance professional that would be an optimal mix of debt (given rising interest rates), and investments (given that some investments may currently be sitting at a loss).
The worst may not be over for South African consumers and the best stance individuals can take is to be proactive in structuring their finances to minimize loss and create liquidity. All this is best done with the assistance of a finance or investment professional remembering that even during what looks like a very difficult economic climate, there will still be opportunities to preserve, and maybe even create, personal wealth.
Samke Mhlongo-Ngwenya is an ex-private banker and founder of The Next Chapter (“TNC”) Wealth Partners.