South Africa looking over the edge of a cliff

South Africa has been bombarded by a slew of bad news, but its government will do the absolute minimum required to keep the country from the edge, says Intellidex analyst Peter Attard Montalto – though it can do little else.

According to Attard Montalto, South Africa is in a negative sentiment spiral, with much of that bad news coming from government. This includes:

• A record quarterly decline of -3.2% for Q1 2019;
• The unemployment rate hitting a new high of 29%;
• Eskom posting a R20.7 billion loss, with no clear turnaround plan;
• State bailouts pushing the country’s account deficit towards 6% of GDP;
• Projected GDP growth rate for 2019 cut to 0.6%;
• Rand volatility, with the most recent trending weaker;
• Reports of mass emigration and offshoring of money;
• Political drive to implement market negative programmes like the NHI, land expropriation without compensation – and talk of prescribed assets.

Yet, despite all these negatives, Attard Montalto says that the country is not about to fall off a cliff – and, indeed, the government wouldn’t let that happen.

The Ramaphosa-led government finds itself in the difficult position of needing to make serious, fundamental changes to truly turn the economy around, but is stuck politically, having to push ahead with the ANC’s policies, which are not always economically sound.

This leaves the government to “bumble along”, putting a band-aid on some festering problems, while keeping the ANC and electorate happy.

“There is a naïve view amongst analysts that the government can about turn when faced with reality. We fundamentally disagree with this,” Attard Montalto said in a note.

“The government is a broad collection of interests reflecting the ANC, but in particular reflecting a very strong streak of leftist views across minister and deputy minister levels,” he said.

“This, combined with the lack of speed and urgency from the Presidency as well as its indecision, means that government will always do the minimum necessary – the deployment of some sticking plasters – but not fundamentally shift the dial on view of the developmental state, of labour laws etc, or in its relationship with the private sector.”

Attard Montalto said that the ANC and president do realise that there is a crisis and there is a need for action, but they prioritise other things which restrict the deployment of political capital.

“And so, sustainable solutions that fundamentally turn the shift around are not present – such as cutting public sector workers sharply or amending labour laws.”

While South Africa has some strengths, like a sound and independent Reserve Bank, and strong social stability, risks like no real plan for Eskom, government pushing tone-deaf policies like NHI and land expropriation without compensation, and the return of load shedding in September still hang over the economy.

IMF bailout

South Africa’s growing debt problem has led to some worries that the country may have to approach the International Monetary Fund (IMF) for a bailout.

When a country borrows from the IMF, its government agrees to adjust its economic policies to overcome the problems that led it to seek financial aid in the first place. These policy adjustments are conditions for IMF loans and serve to ensure that the country will be able to repay the IMF.

According to Sygnia CEO Magda Wierzycka, South Africa is still a few steps away from needing an IMF bailout – but it’s not too far off.

She echoed the views of Attard Montalto, saying that there is no political will to make any of the necessary changes the economy needs to spur growth – such as privatising loss-making state institutions, or retrenching workers.

According to Attard Montalto, South Africa is nowhere close to needing an IMF programme and there are a range of mitigation actions that would be done in the interim to step back from the cliff edge.

Market performance

Concerns that ANC political infighting could stand in the way of the structural change vitally needed to get the economy going again also weighed on investor sentiment, noted Gielie de Swardt, head of retail distribution at Sanlam Investments.

These worries saw the FTSE/JSE All Share Index (ALSI) decline by 2.4% on a total return basis during the month of July and government 10-year bond yields rise from about 8% to more than 8.4% as SOE investor concerns intensified in the last half of the month.

For July as a whole, the FTSE/JSE All Bond Index (ALBI) retraced 0.74% but year to date it has still advanced 6.9%. Foreigners also continued to sell off South African fixed interest and equity assets in what has become the biggest net disinvestment year-to-date since 1998, Swardt said.

Eskom dominated headlines and saw rating agencies take a dimmer view on the country’s fiscal, and thus economic, outlook. Treasury applied for a Special Appropriation Bill to raise twice the initially envisaged funds to bail out Eskom. Fitch and Moody’s responded negatively, with the former downgrading South Africa’s sovereign rating outlook to negative and the latter labelling Eskom as credit negative.

Towards month-end, Eskom delivered financial results, reporting a R20.7 billion loss – less than the expected R25 billion loss expected by the markets and thus not quite as damaging.

On the JSE, the best performing sectors during July were consumer goods (3.1%), technology (2.6%) and telecommunications (2.4%), while the worst performers were the financials (-6.4%), basic materials (-5.2%) and industrials (-3.8%) sectors.

Read: Nedbank cuts growth forecast for South Africa