‘Zero to hero’ for South Africa

South Africa can go from zero to hero following the formation of the Government of National Unity (GNU), which has significantly shifted investor sentiment towards the country.  

Prior to the election at the end of May, South African assets were coming under immense pressure from foreign and local investors dumping stocks and bonds. 

The GNU has given investors a rare chance to be positive about South Africa’s political trajectory and the economic policy of the government. 

Over the past three decades, the ANC-led government has failed to deliver a market-friendly president and consistently implement growth-boosting reforms. 

“When a government borrows, it has to use that money for industrialisation and infrastructure to stimulate economic growth, create much-needed jobs and generate revenue to repay that debt,” the head of fixed-income investments at Stanlib, Victor Mphaphuli, said. 

“Instead, it spent its borrowings on building a patronage economy, with ANC support bolstered by expanding social grants and wage increases for a ballooning public service, including SOE employees. As a result, South Africa’s debt-to-GDP soared.”

As a result, S&P downgraded South Africa’s credit rating to junk status in 2017, followed by Fitch and Moody’s in 2020. 

Junk status refers to a country being sub-investment grade. This prohibits many large pension funds from investing in the country’s financial assets. 

Foreign investors dumped South African bonds, with their share falling from 44% to 25% of the total issuance. 

This made borrowing more expensive for the government and South African corporates. In 2012, the country’s average bond yield was 8.5%. As bonds were sold off, yields rose to 13% during the Covid-19 crisis. 

Today, the debt-to-GDP ratio is over 70%, and the government is turning to austerity measures to prevent further escalation. 

However, the formation of the GNU has resulted in local assets rallying strongly amid investor optimism that a more market-friendly government will reignite the South African economy. 

In an interview with Daily Investor, Standard Bank CEO Sim Tshabalala said the bank is very optimistic about South Africa’s future and has seen a noticeable increase in interest from foreign investors. 

Tshabalala explained that things are already improving in South Africa, with reform processes in the electricity and logistics sectors already underway. 

This has resulted in over 145 days without load-shedding and positive signs at Transnet regarding the export of minerals and its rail network. 

South Africa’s financial markets have responded strongly to the election result, which was more positive than many anticipated. 

The rand is trading around 6% stronger than it did before the election, with the JSE All Share has hit a new all-time high and is up over 12% since the end of May. 

Investors are also more positive about the financial health of the country, with the 10-year bond up 17% since its pre-election lows. 

Tshabalala also explained the findings of a survey regarding the opinions of foreign investors done by Standard Bank’s macroeconomic research department. 

81% of foreign investors surveyed said they were either positive or very positive about the outcome of South Africa’s election. 

More importantly, 95% of respondents suggested they are planning to or considering increasing their investments in South Africa in the next few years. 

Tshabalala also said South African corporates are on the front foot and are actively looking to grow their businesses rather than merely investing to stay operational. 

“As the government continues to execute its structural reforms, business confidence will improve and investment will follow. This will have a positive impact on GDP, and we will support it.” 

South Africa’s economy will also be boosted in the coming months by interest rate cuts, which will free up disposable income. 

As consumer confidence picks up, interest rates are cut, inflation comes down, and the country’s economic growth will pick up. 

This will create a chance for South Africa to enter into a virtuous cycle, leading to a period of sustained economic growth. 

• By Shaun Jacobs
• This article was first published on Daily Investor and has been republished with permission. Read the original here.

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