Our Opinion: 2020

South Africa faces storm

“The storm is upon us,” says South African president Cyril Ramaphosa. Already in recession before the pandemic hit, South Africa has been the fifth-worst hit country in the world measured by the number of coronavirus cases. The International Monetary Fund has just approved an emergency $4.3bn loan to Pretoria, its biggest pandemic-related disbursement yet.

South Africa’s prompt April lockdown ushered in a period of “Ramaphoria”, but there is widespread disillusion as a worsening situation has forced new curbs. The first confinement proved economically ruinous, with three million job losses, thanks in part to the closure of the tourism industry, the economy’s biggest employer. The economy is forecast to contract by 12% this year. To top it all, new problems at electricity monopoly Eskom have brought yet more power cuts.

There was widespread hope that Ramaphosa would prove a reformist breath of fresh air after years of serious corruption under his predecessor, Jacob Zuma. South Africa has been badly served by its leaders of late; real GDP per person has fallen every year since 2015. Rigid labour markets and government debt are pressing concerns, but Ramaphosa is increasingly siding with the statist camp inside his own party, which talks of launching a government bank and pharmaceutical company. More than a fifth of the budget will go on paying debt interest this year. The OECD recently warned that the debt could exceed 100% of GDP by 2022 without consolidation, a dangerously high level for an emerging market.

The local stock-market has so far dodged the worst of the fallout. The benchmark FTSE/JSE Top 40 is up by 2% this year. The country’s leading companies are insulated from the wider economy for a number of reasons. Firstly, over-regulation means that large, oligopolistic companies enjoy significant pricing power, cushioning them from the economic pain. Secondly, more than 60% of the JSE’s Top 40 derives its revenue offshore, leaving local portfolios relatively underexposed to the local economy.

Above all, a recent rally has been juiced by soaring commodity prices. The materials sector accounts for 20% of the MSCI South Africa index, twice as much as on the equivalent UK index.

On a cyclically-adjusted price/earnings ratio of 15.6 South African stocks are currently dearer than the British market. Yet, local companies will not be able to avoid their country’s worsening economic problems forever. Investors should fasten their seatbelts.

15th September 2020