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What is financial repression and how will it impact your savings in the bank?

29 June 2020 12:53 PM
Tags:
South African economy
Debt
Financial repression

Pieter Koekemoer explains that anything that is inflation-linked makes sense, and the more diversified the better.

What exactly is financial repression - and what does it mean for your money in the bank?

Refilwe Moloto chats to Coronation Fund Manager Pieter Koekemoer to break it down for us.

Financial repression is a fancy term for government and monetary policies where you can expect to not really earn ahead of inflation return on short-term savings - from keeping money in the bank, investing in money market funds and investing in what is traditionally considered as cash as a safe asset.

Pieter Koekemoer - Coronation Fund Manager

Why are we talking about this now you might ask?

We had a grim reminder about how tough economic conditions are when Finance Minister Tito Mboweni released his supplementary budget last week.

Pieter Koekemoer - Coronation Fund Manager

Government debt in South Africa will move to a level never seen before even on the best-case plans. And for government to achieve their target of debt-stabilisation over the next three or four years, they would have to do heroic things.

Pieter Koekemoer - Coronation Fund Manager

One of which is cutting government expenditure by close to 9% per year which is a very hard thing to do, he says,

And the debt is not just government debt, he adds. It includes Covid-19 relief programmes, as well as the business disruption caused by the lockdowns.

Basically what is happening is that you have this explosion of debt that needs to be repaid at some point which makes it very difficult to see how interest rates would increase again in the medium term because it makes it harder to get all that debt repaid.

Now, if you look at alternative ways to deal with this problem, that is where the concept of 'financial repression' comes in.

Effectively, if you have a very long period where you don't get a real interest rate or a 'better than inflation' interest rate on cash than you can gently inflate the debt problem away as time rolls by. So it is a subtle way of assisting the borrowers but unfortunately at the expense of the lenders.

Pieter Koekemoer - Coronation Fund Manager

This does not benefit savers so how do you guard against this as government tries to cheapen its debt, asks Refilwe?

He says you have to do something which in this tough time feels counter-intuitive.

You have to invest some of your portfolio in what is generally perceived to be riskier assets, things like commodities, precious metals such as gold, platinum or rhodium - and the producers of commodities like diversified mine businesses such as Anglo American.

He includes companies that have the pricing power that has the ability to protect their revenue base as time goes by because if inflation were to creep up over time, your real assets would increase and protect you.

Investors are very concerned about the future and understandable so, and there is a very significant move of money into these cash-like assets that are perceived to be safe, but where the expected return profile has collapsed.

Pieter Koekemoer - Coronation Fund Manager

Anything that is inflation-linked makes sense, and the more diversified the better.

Pieter Koekemoer - Coronation Fund Manager

Listen to Koekemoer's explanation below:


29 June 2020 12:53 PM
Tags:
South African economy
Debt
Financial repression

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