It is no secret that South Africa is in a bad place economically, and forward projections do not inspire much hope for change any time soon; however, things can improve if politics and policy come to the party.
This is the view of Mark Appleton, head of SA strategy and multi asset at Ashburton Investments, who on Friday laid bare the problems South Africa faces, and where we may be headed.
“South Africa has been left behind in a world that has generally experienced renewed economic vitality. While the rest of the planet is on average enjoying growth rates of circa 3.5%, South Africa will be lucky to achieve growth anywhere close to 1% this year and only marginally more in 2018,” Appleton said.
Even our best projections of 1.5% growth per annum over the next three years is a huge underachievement, when considering the strong growth seen in emerging markets as a whole, he said.
“SA’s potential growth used to be in the region of 3.5% p.a and the extent of underachievement is even more marked when considering that the National Development Plan has a growth target of 5.3%.”
Underpinning all of South Africa’s problems is poor governance and corruption – which exacerbate stubborn issues like a high unemployment rate, high taxes, labour issues and high levels of crime and insecurity.
“An economy thrives on confidence. When confidence is high, businesses invest and consumers spend money. This boosts economic growth. Right now policy uncertainty is high and confidence is low and it is not great surprise to see a lack of private sector investment as a result,” Appleton said.
Policy and politics
According to Appleton, to get out of the conundrum we find ourselves in, we need to prioritise economic growth above all else.
“Politics and policy are key here. The importance of the ANC conference in December cannot be overstated,” he said.
Here, he outlined the three possible broad outcomes to the conference, and what it would mean for South Africa:
- A business-friendly outcome with the uncompromised promise of meaningful reform
“This could well catapult South Africa onto a higher potential growth trajectory. The currency would likely strengthen, bond yields would decline, private sector investment would rise and SA – sensitive equities would re-rate upwards. This is clearly a high road outcome although it carries a relatively low probability in its purest form,” Appleton said.
- A compromised outcome where unity is favoured and the patronage faction is protected
“This is probably the most likely outcome. Matters don’t get worse but the outlook does not brighten. Potential growth remains sub-par and a credit rating downgrade is inevitable. The rand would continue to gradually weaken in line with inflation differentials. We think the market is priced for this to a large degree,” he said.
- A low road outcome is where the patronage faction comes to the fore without any business- friendly compromise
“While we think this is a relatively low probability the investment implications are significant. In this scenario the Government becomes populist and there would be meaningful fiscal erosion. We would be firmly on a credit downgrade path (many downgrades). The rand would weaken, bond yields would rise and the Reserve Bank , assuming it remains independent, would respond with a tightening monetary policy. SA-sensitive equities would de-rate as would SA Property.
Political analysts have widely determined which potential ANC candidate fits into which scenario. In the business-friendly scenario, deputy president Cyril Ramaphosa is seen as the best candidate. In the low-road scenario, former AU chair Nkosazana Dlamini-Zuma is seen to represent that particular group.
The compromise outcome is more up in the air, with analysts pointing to Zweli Mkhize as the most likely ‘compromise’ among the factions, though this could go in many directions – hence the uncertainty attached.
According to Appleton, investors should position themselves to best navigate through the coming turbulence. In Ashburton’s case, the group is focusing on diversification, understanding driving influences, and ensuring efficient cross correlations are important here.
“From an asset allocation perspective, going into a crucial but uncertain event it is important to ensure that our asset class valuations are based on our assessment of the most likely outcome. In this instance our base case middle road outcome is reflected in asset class valuations to a large degree and weightings are not too far from their respective benchmarks,” he said.