Weakening economic conditions combined with the government’s inability to quell corruption will see more HNW wealth in South Africa directed offshore – on top of the 38% already booked abroad.
South African HNW investors are keen offshore investors. And indeed, there are plenty of reasons to book wealth abroad. Corruption is holding the economy back, financial markets are still developing, and investment options remain limited.
As 2020 progresses, we expect further HNW wealth to leave the country. The IMF expects economic growth to be below the rate of population growth for the sixth consecutive year in 2020. Meanwhile, government debt levels – which currently sit at 60% of GDP – could increase to 80% by 2025. Moody’s remains the only ratings agency ranking the country as an “investment grade” borrower, but it is scheduled to review its rating in March 2020.
Forecasts show South Africa’s financial situation is rapidly deteriorating, as low GDP growth will continue to add to the large and rising government debt burden. This makes a credit rating downgrade likely, which in turn has the potential to result in significant outflows from the rand, as some fund managers would be forced to sell off local government bonds in their portfolios.
HNW individuals already have very little incentive to invest locally. Residential property has not beaten inflation in more than a decade, while local equities have returned less than cash investments over the past five years. Yet our data shows that decisions to offshore predominately centre around political and economic considerations. 70% of South African HNW wealth is booked abroad to escape political and economic instability and local currency volatility. In comparison, on a global scale a mere quarter of HNW wealth is held abroad for these reasons.
This does not bode well for the local wealth management sector, as more wealth is expected to leave the country as the year progresses. As inequality remains an issue, we still expect South African HNW wealth to record a compound annual growth rate of 9.2% between the end of 2019 and 2023. However, to capitalise on this a sophisticated offshore proposition is a prerequisite.