South Africa: Politics Look Positive But Risks Remain

Investec Asset Management Director Jeremy Gardiner says South Africa is back from the abyss, but warns global risks remain

External Writer 14 June, 2018 | 10:11AM
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This Perspectives article is part of Your Guide to Emerging Markets. All this week, we are focusing on emerging markets, sharing their potential pitfalls – and where you can make a pretty penny.

Cape Town South Africa frontier emerging markets developing economy table mountain

We’re just shy of halfway through 2018, and South Africans – having put the trauma of 2017 behind us – have settled back into our naturally agitated state. We’re fighting each other over land, racism and wages; unions are marching and politicians are positioning in anticipation of the 2019 elections.

We came to the edge of the abyss, to heading down a potentially irreversible road of economic and financial decline that would have ended tragically in bailouts and junk. Instead, we have a new President who only four months into the job, has surprised even the most optimistic of analysts with his progress, as he almost surgically removes the organs of state capture from our system.

All of this has not gone unnoticed by the rating agencies, foreign investors and international press. Equally, it has not gone unnoticed by South Africans, with both business and consumer confidence for the first quarter showing the highest quarterly rise in years.

South Africa is back. We have a leader we can be proud of in any situation, and whilst much damage has been done to this country over the past decade through incompetence, mismanagement and theft, we are at least heading in the right direction and fixing things, piece by piece.

This confidence is resuscitating growth, jobs, and general business activity. Companies who for the last six months of 2017 were sitting on their hands – and hence piles of cash, refusing to commit, are suddenly investing. Similarly, South African investors are investing again, having also been sitting on cash for a while.

What is interesting though, and so typical of our national psyche, is that investor appetite for offshore investment has as usual declined at exactly the same speed as the mood has recovered.

As always, offshore investment tends to be emotionally driven. When South Africa is in trouble, investors want out whatever the cost, and when South Africa is flying, then nobody is interested.

A Note of Warning

Yes, South Africa is currently looking good. Economically and politically we’re improving by the day and the rand is strong. However, we must always remember that the fortunes of our economy, and indeed the rand, are often far more influenced by global events and the impact they have on emerging markets, than on what the mood is back home.

And global risks certainly remain, despite ‘the beloved leader’ sitting down around a table with South Korea for the first time ever, and possibly even with Donald Trump. There’s a tariff war going on, which could easily escalate and potentially even push the global economy into recession. The oil price is rising, stoking fears of inflation, which would drive US interest rates higher than expected.

All of the above are quite possible, and in some cases even likely. It would spook investors, leading to a risk-off environment and result in billions of dollars being pulled back home out of emerging markets leaving a trail of emerging market economic and currency declines in their wake.

Flows into emerging market bond funds last year were at three-year highs, despite the fact that the economic quality of emerging markets, according to rating agencies, was at its lowest level since 2010. A reversal in the current strongly positive emerging market sentiment is therefore not only possible, but likely.

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