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Bugle Sales Talk Editorial

Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2015-12-11
Two noteworthy things happened last week that property investors in South Africa should keep an eye on. The first was the downgrading of South Africa's sovereign credit ratings by international ratings agencies Fitch and Standard and Poor. Fitch downgraded South Africa to BBB-, which is the lowest "Investment Grade" notch, below this being termed "Junk Status". Standard and Poor kept its rating of South Africa at BBB-, but lowered its outlook from stable to negative. For a country the view of these international ratings agencies should be considered important and a downgrade is significant in that it has the potential of increasing the cost of raising finance and influences where fund managers choose to invest their capital.

The ability for us as a country to attract capital market investment is critical in being able to finance the current account deficit (the difference between our imports and exports). As we typically as a nation import more that we export, we have to pay for these excess imports through the funds invested in our capital markets by offshore sources. The risk of course is if capital market investors lose interest in our markets and become net sellers of equities and bonds, either because our risk/return assessment by them turns negative or if alternate and competing investment destinations just seem better. These money managers are often restricted to only investing in sovereign debt, which meets a minimum investment grade standard.

As soon as a country such as South Africa falls out of the investment grade standard ranking, those large investment funds would typically sell the South African assets and replace them with alternate assets which do meet the minimum standard. As a country this is a scenario we would desperately like to avoid as it would have a direct and immediate impact on our currency's exchange rate, our local inflation rate and our local interest rates. The link between those key macro-economic variables and our local demand for residential property is a relatively short one and something we as property professionals are all too aware of.

In the detailed report on South Africa, Fitch provided reasons for those aspects that have a high impact on their rating valuation. These are mentioned as being our underperformance in terms of GDP growth, the inability to bring new sources of electricity supply on stream within the planned time frame, our inability to deliver on the National Development Plan goals, and our World Bank ranking of a place to do business falling from 69th to 73rd position. Not a great report card and we are being punished for it by a downward revision in our ratings.

The second key newsworthy aspect was the meeting held by OPEC (Organisation of Petroleum Exporting Countries) - that economics 101 textbook case study of a cartel and how production volumes are manipulated to determine global supply and therefore global pricing. South Africa is a huge beneficiary of low global oil prices and this is currently a windfall to us in terms of lower inflation pressure throughout our economy. OPECs decision to maintain current oil production levels by its members means that oil prices should remain subdued for the immediate future. This is excellent news for us.

Although there are other factors acting as local inflation drivers, such as higher food prices and higher electricity rates, the price of oil and local fuel touches almost every aspect of our economy. As long as oil prices remain low, there is every reason to believe the Reserve Bank will have the opportunity to keep interest rate increases to the absolute minimum.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com