Johannesburg - South Africa was the most exposed sub-Saharan African country to market volatility and a potential shift in investors’ risk perceptions linked to Britain’s decision to leave the EU, ratings agency Moody’s said on Friday.
Although Moody’s said it expected South Africa would avoid a recession this year, it added that the speed of any likely economic recovery and medium-term growth, which are already constrained by structural impediment, could be adversely affected if Brexit were to lead to increased risk aversion and reduced investor appetite towards emerging markets.
“Countries such as South Africa that rely on private sector capital inflows to finance large current account deficits are at greater risk than others,” Moody’s said in a report, one of a series on the impact of Brexit on sovereigns in different regions.
It said dampened growth prospects in the UK would also have a moderate negative impact on South Africa’s trade and growth.
Downside risk
“The extent to which Brexit-related uncertainty might delay investment decisions introduces a downside risk to anticipated foreign direct investment (FDI) flows going forward.
“South Africa has been the largest recipient of UK FDI in Africa, accounting for about 30 percent of total UK investment in Africa in 2014.
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The ratings agency said in 2015 UK residents represented 17 percent of overseas tourists visiting South Africa.
It said the extent of South Africa’s integration into global financial markets, including its investment and financial links with the UK, meant it was sub-Saharan Africa’s most exposed sovereign to the immediate financial sector fallout from the Brexit.
“The rand’s initial depreciation relative to the dollar was greater than that of most other emerging market currencies, reflecting its close ties with the UK and reliance on foreign flows to finance its current account deficit.
“That said, within a week of the Brexit vote, the exchange rate had almost recovered to pre-Brexit levels. Similarly, the Johannesburg Stock Exchange index fell sharply by 4 percent in a day, but has since recovered.”
Moody’s said South Africa, already grappling with the impact of a severe regional drought and a slide in commodity prices due to subdued demand from China, would probably avoid a recession this year.
But the speed of any likely economic recovery and medium-term growth, which are already constrained by structural impediment, could be adversely affected if Brexit were to lead to increased risk aversion.
Reserve Bank deputy governor Daniel Mminele said last week that South Africa would probably be negatively affected by heightened market volatility and the impact of the Brexit on the EU and the global economy.
Linkages
He said the financial linkages between South Africa and the UK were somewhat large, if one considered that at the end of 2014, South Africa’s liabilities to the UK amounted to 46.5 percent of gross domestic product (GDP), while assets amounted to 33.2 percent of GDP. In addition, both FDI and portfolio flows are also significant.
“This means that South Africa could very well be affected by the realisation of tail risks emanating from asset liquidation by UK corporates and investment funds.
“However, as time progresses and the respective parties provide clarity on the process, the storm is likely to calm.”
Ratings agencies and investors are also uncertain about the direction of economic policy in South Africa after President Jacob Zuma triggered a political storm by changing finance ministers twice in less than a week in December.
The country dodged downgrades to sub-investment grade ratings from Moody’s, Fitch and S&P Global Ratings earlier this year, but still faces the danger of sliding into “junk” by the end of the year if the economic outlook deteriorates.
BUSINESS REPORT