Pay off your debts – and don't take on any more

Make sure you have planned for unforeseen events, and look at your savings practices.(Flickr)

Make sure you have planned for unforeseen events, and look at your savings practices.(Flickr)

The flash crash of the rand earlier this week is due to a number of international and domestic factors, none of which augurs well for South Africa’s economy or consumers.

The growing consensus is that 2016 will be a year of miserably low economic growth, rising inflation and rising interest rates.

But there are ways to guard against this, according to experts. They may seem obvious but they can help to keep consumers financially resilient in the months ahead.

Early on Monday, the rand briefly reached record lows of almost R18 to the dollar in Asian markets.

“This is more than just a [President] Jacob Zuma story, although political decisions are certainly a feature,” said Adrian Saville, the chief strategist of wealth management firm Citadel. He was referring to the decision late last year by Zuma to shuffle finance ministers twice in one week, which spooked local and international investors.

Alongside structural factors such as South Africa losing its competitive footing in world markets, seen in its declining share of global exports, the behaviour of the rand is also being affected by cyclical factors, he said.

Among these is the dramatic decline in expectations for final economic growth figures for 2015. At the start of last year, growth was pegged at 3% but, thanks to the country’s electricity constraints and the ongoing drought, it is likely to be closer to 1.5%, Saville said.

The expectations for 2016 are equally gloomy. “We will be lucky if we produce better than 1%,” he said.

Turbulence in the Chinese market, which has eroded sentiment over emerging markets, is another factor, he added. Because of the rand’s tradability, it is a proxy for other emerging markets.

“This is an extraordinarily anxious time, not just for South Africa but for all emerging markets,” he said.

The weakening currency will result in rising inflation, possibly to more than 7% in the first half of 2016, which will put pressure on the Reserve Bank to hike interest rates, Saville said.

Eric Enslin, the chief executive of FNB Private Wealth & RMB Private Bank, said low growth and rising inflation and interest rates will reduce the disposable income of both individuals and businesses. This could mean a rise in retrenchments.

Under these circumstances, consumers can take a few simple steps to protect themselves.

They must understand their finances properly, Enslin said. Most importantly, they need to have a grasp on their debt, and must make its repayment a priority. “Don’t incur unnecessary and additional debt and prioritise its repayment, starting with your most expensive debt,” he said.

If possible, make sure you have planned for unforeseen events, such as retrenchment, by setting aside some cash.

Finally, look at your savings practices. An easy way to access the growth in offshore markets is to invest in the shares of local companies with exposure to these regions.

Investing in locally listed companies such as British American Tobacco, whose earnings are predominantly generated offshore and in foreign currency, gives retail investors indirect exposure to their improved returns. This also doesn’t require that you take money offshore, which can be both expensive given the weakness of the rand and have regulatory and tax implications.

Saville also warned against taking on debt. If you do take on debt, make sure it is in an asset that is inflation hedged, he said – in other words, it must be a real asset like a house. “This is a bad time to be buying a [new] car,” he added.

Because of the drought, consumers can expect food prices to rise. Factor this into household budgeting, he urged. But there is no quick fix. Enslin said consumers will just have to “work through this as best they can”.

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