Johannesburg - Not since Nelson Mandela walked out of Victor Verster prison 26 years ago have investors been gloomier about South Africa’s economy.
Money is pouring out at a record pace as inflows dwindle. The rand has plunged and unemployment is the highest among almost 40 developing nations tracked by Bloomberg. Drought is driving up food costs. Hanging in the balance is the investment-grade credit rating South Africa sweated to achieve in 2000, shortly after Mandela left office.
South Africans are paying the price not just for a collapse in commodities prices - metals and mining contribute more than 50% of exports - but for growing questions over whether President Jacob Zuma is up to the task.
Stoking doubts were the antics at the Finance Ministry in December, when Zuma removed Nhlanhla Nene and replaced him with little-known lawmaker David van Rooyen. As bond yields soared and the rand crashed, he changed his mind four days later and installed Pravin Gordhan, Nene’s predecessor.
“The country still faces serious structural challenges, and the changes at the top of the Finance Ministry just reconfirmed the policy risks,” says Viktor Szabo, who helps manage R185bn of emerging-market debt at Aberdeen Asset Management. “Things could get worse.”
Budget the key test
A key test looms on February 24 when Gordhan presents the national budget to lawmakers. He has said the government will do everything necessary to avoid a downgrade to junk, including reining in free-spending state enterprises and sticking to expenditure ceilings.
“The trust towards South Africa disappeared,” said Hakan Aksoy, a London-based bond fund manager at Pioneer Investment Management in London, which oversees €224bn (R3.76trn).
Since multiracial elections brought Mandela to power in 1994, the economy has grown an average of 3% a year, enabling the ruling African National Congress to provide housing, water and electricity to millions of households and extend social grants to more than 16 million people, while cutting government debt. The country’s benchmark stock index soared to a record less than a year ago, while bond yields fell to record lows.
Since then, the bottom has fallen out. The commodity rout could leave the economy growing at the slowest pace this year since 2009. The country narrowly avoided a recession during the third quarter, posting annualised expansion of 0.7%.
Fitch Ratings on December 4 cut South Africa’s credit rating one level to BBB-, the lowest investment grade, and in line with the assessment of Standard & Poor’s, which lowered its outlook to negative from stable on the same day.
Gordhan, and increasingly Zuma too, recognise the challenge.
In the past month, Gordhan has held meetings with heads of the country’s biggest companies to ask their advice on ways to stimulate the economy, while Zuma promised measures to appease the rating companies, including spending restraints and privatisation of some state-owned companies.
The rand has recovered some losses, gaining 3.1% against the dollar in February after plunging 27% in the previous 12 months, and bond yields fell.
While Gordhan’s statements since taking office have been “good signals,” they may not be enough, according to Konrad Reuss, S&P’s managing director for Africa.
South Africa’s “dismal” growth is the rating company’s biggest concern, while policy will remain under close scrutiny following the replacement of the finance minister, he said.
Foreign investors sold R43bn in five months
His scepticism is reflected in accelerating capital flight. Domestic investors more than doubled the amount sent overseas to R24.2bn in the third quarter from R10bn in the previous three months, according to central bank data.
Foreign investors sold a net R43bn of stocks and bonds in the final five months of 2015; there’s no sign they’re returning, with net outflows this year at R19bn as of February 12.
While South Africa’s hardly alone among emerging-market nations that rely on commodity exports - Brazil and Russia, among others, have seen their currencies tumble and ratings reduced to junk - the policy bungles came at the worst possible time. And with local elections looming this year, Gordhan will have to convince investors he can withstand political pressure to increase spending.
“We are likely to remain quite cautious at current prices,” said Kieran Curtis, the London-based director of investment at Standard Life Investments, which oversees about R6.7trn and is underweight South African debt.
“The wish list of things that investors have is quite long and not really very achievable with the current political dynamic.”