Moody’s Investors Service (“Moody’s”) recently cut South Africa’s credit rating below investment grade as it grapples with a nationwide lockdown to curb the spread of the Novel Coronavirus.
The company’s assessment graded the nation’s foreign and local currency debt at “Ba1”, which is one level below investment grade. The move reflects “continuing deterioration in fiscal strength and structurally very weak growth”, the company said in a statement last Friday. The outlook on the rating remains negative.
According to the report, South Africa is entering a period of slowed global growth and increased economic vulnerability due to its unreliable electricity supply, persistent weak business confidence and investment, as well as long-standing structural labor market challenges that continue to constrain South Africa’s economic growth.
Last November, Moody’s changed the outlook on the country’s ratings to negative, saying it wanted to see a credible strategy in the February budget for halting a deterioration in public finances. However, the spending plans presented by Finance Minister Tito Mboweni last month showed the fiscal deficit would widen to an almost three-decade high. The nationwide lockdown that suspended all activity except essential services from Friday means the budget shortfall and the government’s debt burden could deteriorate even further. The downgrade also leaves South Africa without an investment-grade rating for the first time in 25 years and will cause it to fall out of the FTSE World Government Bond Index, which could prompt significant capital outflows. It will also raise borrowing costs, complicating the government’s efforts to narrow the budget gap.
Opportunity to Protect Hard-Earned Rands
The South African rand has always been a vulnerable and volatile currency. Last year, South Africa’s currency was drastically affected by talk of land expropriation, investor confidence, and the fact that the country slipped into a technical recession.
One of the ways a South African can protect his or her wealth is by investing abroad in a currency that enjoys less volatility (erratic and unpredictable fluctuations) and more stability. The American dollar is often looked favorably as a ‘shelter’ among South African investors. This is because the US dollar is considered a safe haven investment. It is one of the countries least likely to default on its debt and with such an enormous economy as a backer, it will provide stability to investors – particularly international investors.
One way for South Africans to expose themselves to the US dollar is through the investment of local real estate through the EB-5 visa program, which is an immigrant investor visa program created by the United States Congress in 1990 that allows eligible immigrant investors to become lawful permanent citizens by investing a minimum required amount into a designated project and that project creates a minimum of 10 jobs in the process.
There are many advantages to investing in an EB-5 project but one thing it does offer is protection for investor’s hard-earned money. If one were to invest in a project in the US, the money investment would be in US dollars, effectively hedging currency risk. Further, at the end of the investment term, one would be entitled to receive the investment back in US dollars. At that point, it could be reinvested or converted back to South African Rands – most likely at a very favorable exchange rate as the dollar will likely have appreciated further against the Rand.
More than solely protecting wealth, investors will also be able to obtain residency through EB-5, provided the investor funds the investment legally and creates the required jobs. In fact, America may also be a place where such an investor may consider retiring to or setting up a home or business to further enjoy the same rights as any American citizen, aside from voting and working in a government job.
Overall, the program gives one the opportunity to take control of their destiny as the next turn comes. It will open doors and options for them and their family’s future, while at the same time offering a great hedge against the Rand in times of trouble.
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