Is my money safe in RSA Retail Bonds?

A comment we have heard more than once when discussing RSA Retail Bonds is:

"I'd rather give my money to Old Mutual than to the Government — the Government is likely to steal it."

It is hard not to be discouraged by much of what is going on politically and with our state institutions, but the financial reality is straightforward:

• The willingness and ability of the State to service its locally issued debt is very strong, and stronger than that of any other local borrower (banks, state-owned enterprises, corporates).
• Money placed with Old Mutual, or any other money manager, is typically invested on your behalf back into those same borrowers — the manager is just a conduit.

Even if you don't trust the politicians, government-issued debt remains the safest of all interest-bearing debt in South Africa, and RSA Retail Bonds are safer still because they are only issued to retail savers — and retail savers are first in the queue when problems arise.

By all means use a money manager if you believe they will deliver better performance. But choosing a manager because you think the money is inherently safer with them than with the Government is incorrect.

Who you're lending to, and how likely they are to repay you

Three rating agencies — Moody's, S&P, Fitch — score borrowers on credit-worthiness. They are not infallible (none of them spotted the 2008 crisis early), but they give a useful framework.

| Issuer | Rating | Description | Comment | |---|---|---|---| | SA Government | AAA | Capacity to meet financial commitments is extremely strong. | Governments do fail, and SA has its issues, but for governments to default on locally issued debt is almost unheard of. | | ABSA, FirstRand, Nedbank, Standard Bank | AA− | Capacity to meet financial commitments is very strong — a small degree below AAA. | Too Big to (be allowed to) Fail. | | Investec | AA− | Capacity to meet financial commitments is very strong. | Probably Too Big to (be allowed to) Fail. | | Capitec | A | Capacity to meet financial commitments is still strong, but more susceptible to adverse changes in circumstances. | Probably not Too Big to (be allowed to) Fail. |

These are the ratings on the local debt at the time of writing. Verify against current agency reports before relying on them — ratings change.

"Too big to fail" doesn't mean "depositors are made whole"

Just because a bank may not be allowed to collapse outright does not mean depositors face zero losses. Since 2008, regulators worldwide have been engineering rules to prevent the next bank failure landing on taxpayers. The mechanism is to "bail in" depositors and bondholders rather than bail them out.

For South Africa specifically:

• The Reserve Bank has historically compensated depositors of failed banks on a case-by-case basis, but stresses that this implicit guarantee "does not mean 100% coverage".
• After the African Bank collapse, the Reserve Bank covered retail deposits totalling R100 million. Wholesale depositors and bondholders did face losses.
• A formal deposit insurance scheme covering up to R100 000 per depositor per bank is in place for retail and SME accounts.
• Deposits not covered include those of the non-bank private financial sector — money-market funds, unit trusts, insurers, pension funds, and fund managers.

Stay retail

The single best defence against problems at a borrower has been observed to be your status as a retail investor.

| Product | Retail status | |---|---| | Bank deposit (in your own name) | Retail | | RSA Retail Bond | Retail | | Money-market fund | Not retail | | Bond fund | Not retail |

Stay retail where you can, or at least understand the consequences of not being retail.

Don't reach for yield

Your savings are too important to be pushed down the credit curve for a marginal pickup in interest:

• A lower-rated bank paying 1% more than a higher-rated bank, on R100 000, is R1 000 of extra interest a year. That figure means very little if the bank fails.
• The yield on offer is itself a credit signal. If it looks too good to be true, it usually is.
• Bank rates do vary. Negotiate. Show your bank what other banks are offering and push for a better deal. If they won't move, opening an account at the better-rate bank has never been easier.

See the Rates & Yields page for our current rate comparisons.