Dark clouds for South Africa
South Africa has experienced a ‘dark quarter’ and a challenging first half of the year, with asset management firm Futuregrowth warning that investors are worried about the country’s growth prospects for the remainder of 2023.
In an investment note this week, Futuregrowth said that navigating blackouts has become part of the daily routine for the average South African – and as a result, investors are concerned about the negative impact on economic growth prospects in the country.
“For foreign investors, in particular, the growing possibility of a grid collapse and its devastating consequences severely dented risk appetite. This was expressed via an accelerated reduction of exposure to South African financial assets, including government bonds.
“As a result, the foreign shareholding of SA government bonds declined to 25.1% by the end of May, the lowest level in more than twelve years,” the group said.
Talk of grid collapse reached a fever pitch at the end of May 2023, when investors were flung into a panic that such a situation was becoming more likely, fanning fears that South Africa would be without power for up to three weeks.
The panic – combined with geopolitical missteps and accusations of South Africa aiding Russia with arms – pushed the rand to almost R20 to the dollar at the time.
Since then, investors have calmed down on the grid collapse angle. Analysts, like Intellidex director Peter Attard Montalto, have explained on several occasions that grid collapse is highly unlikely, and even if it were to happen, the structure of the grid and contingency plans in place make the manner, duration and result of a collapse highly variable.
However, Futuregrowth noted that investor fears are not only driven by load shedding and the status of the grid.
“Even more concerning from an inflation point of view is the broad-based weakening of the local currency against a trade-weighted basket of currencies. Diplomatic own goals like the alleged supply of weapons to Russia and the potential impact on international trade further contributed to the souring of foreign appetite for financial assets,” it said.
“While unsettling offshore developments such as the US debt ceiling debacle and sustained policy tightening by some of the developed world’s major central banks added to general risk aversion, the core driver of local discontent remained the impact of the developments described above on an already fragile fiscal situation.”
Thankfully for South Africa, reduced load shedding intensity in June contributed to improved market conditions into the quarter end. Disinflation (inflation trending lower) also appears to be setting in with the trend expected to continue in the next few months, the group said.
Data releases over the latest quarter also point to businesses being more resilient than expected, boosting economic growth, at least for the second quarter print.
Despite these ‘bright spots’, Futuregrowth said the overall picture for Q2 and the start to the 2023/24 financial year remains bleak.
“While the rate of inflation, both at consumer and producer levels, was ever so slowly grinding lower, investors turned their focus to the devastating impact of the numerous structural failures on South Africa’s economic growth prospects and performance.
“Apart from the continued weakening of the economic backdrop, at least in part due to poor macroeconomic management, the political fallout from the South African/Russian alliance also contributed to a sharply weakening currency,” Futuregrowth said.
“Some improvement to the backdrop in June, including a significant reduction in the intensity of load shedding together with cheaper market valuation, lured investors back into bonds, which allowed the bond market to regain some lost ground. Even so, the performance of the (bond index) for the second quarter was still a dismal -1.53%.”
According to Nedbank’s latest economic assessment, prospects for the remainder of the year remain cloudy and uncertain.
It said the outlook for capital markets is highly uncertain; the direction of the rand is difficult to call; interest rates could tick higher; and consumer and business confidence is likely to remain under strain.
Inflation should be coming down – though key indicators, like food inflation, may still be susceptible to global weather conditions and may not decelerate as quickly.
South Africa narrowly avoided a technical recession in the first quarter of the year, printing +0.4% to GDP growth quarter-on-quarter.
Nedbank currently anticipates Q2 GDP growth to reflect similar activity, with +0.4% qoq pencilled in. Annual GDP growth is still muted, however, with most financial firms expecting between -1.0% and +0.5% for the year.
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