JOHANNESBURG - The Institute of International Finance (IIF) said yesterday that its daily tracker showed South Africa experienced net outflows of non-resident portfolio equity in the first quarter while debt flows recovered only modestly.
The institute, of which Investec, Standard Bank, FirstRand, Nedbank and Stanlib Asset Management are member institutions, said it expected increased uncertainty around South Africa’s sovereign rating to reduce capital inflows further this year. IIF associate economist Gregory Basile said the slowdown in non-resident inflows would be met with a further contraction in resident outflows, as has happened in the past, such that net capital inflows remain relatively stable.
“Non-resident inflows are expected to pick up again in 2020 as fears of a possible downgrade subside, and South Africa moves past its elections and begins to address high fiscal deficits,” Basile said. “We project real gross domestic product growth to rise from 0.8 percent in 2018 to 1.3 percent in 2019 and 1.7 percent in 2020 as public investment stabilises and private consumption picks up with relatively low inflation boosting real wages.”
The IIF, however, warned that risks remain skewed toward the downside as South Africa continues to face large external financing needs due to a persistent current account deficit. South Africa’s current account deficit narrowed to 2.2 percent of gross domestic product in the fourth quarter of 2018 due to weak demand and stronger exports.
Capital Economics senior emerging markets economist John Ashbourne said a sustained reduction of the current account would require a change in the structure of the economy.
“The biggest driver of the shortfall is the country’s income account, which is caused by the repatriation of profits from foreign investors. (Many of them South African-focused firms that are tax-resident abroad.) This is unlikely to change over the short term,” Ashbourne said.
The IFF further warned that large outflows could also materialise if rating agencies place South Africa at junk status, which would result in a possible exclusion from several major global capital indices. Moody’s last week backed the country’s credit profile to remain in line with those of investment-rated sovereigns.
The rating agency said that the country’s credit profile was supported by a diversified economy, a sound macroeconomic policy framework and a deep pool of domestic investors due to a well-developed financial sector and markets. The IIF said lower growth and tighter international liquidity reduced non-resident inflows from $28 billion (R393.8bn) in 2017 to $21bn last year. It said the decline came from a $14bn reduction in portfolio inflows, both equity and debt, partially offset by a near doubling in other investments.