Bullish on South Africa: The next weeks will herald a new dawn
The performance of South African financial markets since Ramaphosa became president of the country in 2018 has been atrocious to say the least. Yes, emerging markets came under pressure, global economic activity slowed down as the Sino/US trade war intensified and Brexit worries rattled markets. But the real reasons go deeper than that.
Since the end of the first quarter last year, when President Ramaphosa took the reins, the rand slumped by nearly 30percent against the US dollar and fell by nearly 15percent against an equity market-weighted basket of emerging market currencies.
The losses on the JSE were nearly double that of emerging market equities, while South African bonds as measured by the All Bond Index lost 15percent in terms of dollars, in stark contrast to global bonds as measured by the JPMorgan Global Government Bond Index’s positive return in excess of 11percent in terms of dollars.
One does not have to search far to ascertain the causes behind the very disappointing returns of the South African financial markets.
In my analysis I assumed that the data of key economic indicators of South Africa from 2010 to 2014 would be some sort of long-term target for the South African economy. Yes, during the period before the manifestation of malfeasance, governance failures and bad planning and execution on the South African economy.
President Ramaphosa’s election as president of the ruling party in December 2017 and his inauguration as president of the country had a major impact on the South African economy in the first quarter last year. The diversions from the “long-term targets” as defined indicate that the economy ticked the right boxes at the end of the first quarter. Business confidence was still somewhat negative but improving. Yes, president Ramaphosa’s scorecard was impressive.
Today, barely six quarters later, the scorecard is nothing to be proud of. It shows a massive decay in the South African economy in virtually all aspects except in fiscal discipline to some extent. The continued disarray in state organs such as Sars and state-owned enterprises (SOEs) such as Eskom, SAA, Denel and SABC derailed the economy and South African financial markets over the past 18 months.
Confidence was shattered, specifically with the uncertainties created by land reform plans and the unstable power supply. The economy continues to teeter on the brink of recession, manufacturing production and fixed investment are going nowhere, jobs are lost, the consumers have gone cold and the government is forced to bail out SOEs. Government debt as well as the debt of SOEs are rising at an alarming rate.
“President Ramaphosa, do something” is echoed by all stakeholders including business, holders of government debt, ordinary citizens and all patriots inside and outside the country. Since the country entrusted president Ramaphosa as leader of the country during the elections in May it is evident that his detractors are still doing their best to have it their way, creating the perception that “more of the same of doing nothing” is in the offing. Yes, they were partially successful in the first 12 months since President Ramaphosa took over in the first quarter last year.
Criminal activities caused major capital starvation over the past few years and sunk the economy. But no more. President Ramaphosa and his “A” team are tackling the “wrongdoing bulls” in SOEs and corporates by the horns.
I am of the opinion that the next two weeks will herald a new dawn for the South African economy and domestic financial markets. I think the upcoming announcements about the restructuring of Eskom and the finance minister's medium-term budget next week will and should indicate that South Africa is turning the corner for the better. Inward investing will be the new narrative in government, labour, financial institutions and investors.
I will also not be surprised if the Monetary Policy Committee becomes more dovish and cuts interest rates as part of a total package to boost the economy. It will do much for business and consumer sentiment and government income.
The South African economy and financial markets will suffer should the announcements turn out to be a damp squib, but I think President Ramaphosa and his team are acutely aware of it. South Africa has no choice but to act immediately and decisively. I think we will see a major improvement in the president's economic scorecard a year from now.
As Rome was not built in one day, a re-rating of the South African financial markets will not happen overnight. I am bullish on South Africa and the South African financial markets. It is early days, though.
Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. You should consult your adviser.