What is financial repression and how will it impact your savings in the bank?
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:
Absa CEO Daniel Mminele says they had to transition very quickly within a very space of time into operating in a new normal.Read More
Wendy Knowler says it is expensive to issue or bank a cheque. For example, to deposit a cheque can cost well over R100.Read More
Caroline Da Silva of the FSCA says they will look into patterns of complaints to see how to change a bank's behaviour.Read More
The most recent example is China’s new security law introduced into Hong Kong.Read More
Lawyer PJ Veldhuizen says Judge Le Grange's judgment will be precedent-setting until it goes on appeal.Read More
Traffic volumes on the N1, N2, N7 and M5 freeways were only at about 65% of normal levels by the end of June.Read More
For some properties – with interest rates at half-a-century lows – it’s becoming cheaper to buy than to rent.Read More
Good Party Brett Herron and former Wesgro board chair Brian Figaji share their perspectives with Refilwe Moloto.Read More
The Western Cape High Court has ruled that Guardrisk must pay Cape Town restaurant, Cafe Chameleon, for its business interruption claim.Read More
Scorpio investigative journalist at Daily Maverick, Pauli van Wyk explains how VBS CFO Philip Truter was paid to keep quiet.Read More