South Africa is in deep trouble and faces five tough years

 ·25 May 2024

Renowned economist Dawie Roodt warned that South Africa is in deep financial trouble and faces many tough years trying to address its challenges.

Roodt said South Africa faces three main challenges – dismal state finances, collapsing local authorities, and poor state-owned institutions.

  • Local authorities are collapsing and face serious financial problems. They are important because they give citizens electricity, water, and roads.

  • State-owned enterprises are in a dismal state. Most of them have collapsed because of mismanagement and corruption. Many, like Eskom and Transnet, are crucially important to the economy.

  • South Africa’s national accounts are in serious trouble and have become unsustainable, with debt of between 75% and 90% of GDP.

However, this is not where the problems end. South Africa faces numerous other challenges, including poor labour and trade policies and strained international relations.

Over the past two years, South Africa has antagonised some of its biggest trading partners, including Europe, the United States, and the United Kingdom.

Its pro-Russia stance regarding the Ukraine war and decision to take Israel to the International Court of Justice did not sit well with some United States leaders.

Lawmakers in Washington are reviewing the bilateral relationship between South Africa and the United States amid geopolitical differences.

The country is also plagued by high unemployment, an unstable electricity supply, collapsing infrastructure, and political instability.

It has reached such concerning levels that some high-profile business leaders have warned that South Africa is heading towards becoming a failed state.

Roodt said these challenges would eventually cause the ANC to lose enough support so that the country could get a new government.

However, he warned that this transition period would be painful. He likened it to the early nineties when South Africa moved towards democracy.

“The next five years are going to be very difficult because it is a transition period where we are getting rid of the ruling party,” he said.

Not all doom and gloom

Efficient Group chief economist Dawie Roodt

Despite South Africa’s major economic, social, and financial challenges, there are many positive aspects to the country.

Roodt highlighted that South Africa has an active civil society, an independent press, and a good judiciary that works.

He added that the ruling party, for the most part, abide by rulings from the courts. That bodes well for the country.

Although it will not prevent things from going horribly wrong, it lays the foundation for fixing the existing problems.

South Africa had previously overcome tremendous challenges during the transition from Apartheid to a democracy.

“Let us trust democracy. Let’s work together and see if we can, once again, facilitate a peaceful political transition.”

Another positive thing is that South Africa’s financial markets can rally on a good election outcome.

Roodt said the best scenario would be for the ANC to get between 45% and 50% and form a collation with right-leaning political parties.

This scenario will benefit the economy, bolster the equity and bond markets, and strengthen the rand.

Roodt said JSE is between 30% and 50% behind similar global markets. It did not benefit from the global bull market over the last eighteen months.

A good news story can increase the JSE by 20% to 30%. “The JSE is a highly undervalued market. That means that equities are very cheap in South Africa,” he said.

South Africa’s capital market is also cheap and gives yields of around 10%. “A positive election outcome can bolster the capital market by 200 basis points,” Roodt said.

Another beneficiary of favourable election results is the rand’s exchange rate. Although the rand has strengthened in recent weeks, it is still undervalued.

“The rand has been under tremendous pressure. Although it is always undervalued, it is now more undervalued than previously,” he said.

“A good outcome in the elections can see the rand strengthen to R17.50 or even R17.00 against the US dollar.”

These are the immediate impacts on the financial markets should South Africa’s 2024 general elections yield a positive result.

These impacts will spill over into lower inflation, lower interest rates, more investments, and stronger economic growth.

Read: Tax changes for remote workers in South Africa – what you should know

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