The question at the forefront of our clients’ minds now when they consider fixed-income investment in SA is: “How safe is it to invest in SA government bonds given the current fiscal situation?”. We have considered four different scenarios, which sit on a continuum.
In the other plausible scenario the economy also drifts along, but government expenditure exceeds revenue and the country ultimately requires a bailout, accompanied by enforced policy corrections. Though the bailout agency is most likely the IMF, it could also be Russian or Chinese financing. In the event of a failed state, we would see populist solutions take preference over prudence — for example the government printing money to finance its debt, or taking money from pensions, instituting prescribed assets and defaulting on the national debt.
A worrying indicator that the country could be heading for a bailout is continued state support for failing SOEs. More positively, the government has rejected many populist positions, such as implementing prescribed assets or nationalising the Reserve Bank. But things could change in five years.
The IMF is the high road. The probability of Govt to make a 180 degree turn towards rational economic decisions is less than 1 %. For them idealism trumps conmon sense every time