South Africa: Ramaphosa's Challenges Loom Large - Emerging Market Views

South Africa: Ramaphosa’s Challenges Loom Large

Earlier this year, new South African President Cyril Ramaphosa announced plans to attract 1 trillion rand (ZAR) in foreign long-term capital to help underpin his economic development plan and reverse periods of underinvestment and stagnant growth. He quickly secured pledges from China, Saudi Arabia and the UAE for about half of that amount, and hosted a successful BRICS summit at the end of July, which focused on investment for Africa and countering trade protectionism.

There are questions surrounding South Africa’s ability to continue to attract and absorb additional funds, and the impact they might have on the country’s economy, society and asset markets.

Who is investing and in this investment likely to come to fruition? How vulnerable is South Africa to the escalating trade rhetoric globally?

Direct Investment vs. Portfolio Flows

South Africa has been relatively a winner in 2018, attracting significant portfolio capital inflow early in the year following the ANC’s election of Ramaphosa to replace former President Zuma. The inflows, mostly into the debt market, as part of global yield seeking, reflected South Africa’s moderate resilience to some emerging market (EM) capital flight, though of course it was far from not immune. As a country with a sizeable current account deficit, a net importer of fuel and low real interest rates, South Africa’s currency came under pressure, just not as much as EM peers like Brazil or Turkey, which faced major questions about the direction of policy in coming years or which had more acute rather than chronic balance of payment or other macro issues.

“As the IMF has recently noted, South Africa’s monetary predictability has helped alleviate what might otherwise have been worse economic outcomes.”

South Africa’s economic growth has been lackluster but positive, benefiting from some of the increased precious and base metal demand despite a lack of increased volume. Local consumption has continued to grow supported by regional migration. The banks continue to have solid balance sheets, with limited increase in credit but without the big foreign exchange (FX) or other imbalances present in some EM peers. This stability however does little to significantly increase incomes or profits, and debt levels, regulation in key sectors and SOE trends make it hard to get out of this stagnation. With interest rates rising globally and reflation on course, just relying on buffers to avoid recession is not going to address the need for sustainable growth.

Zuma had announced a small stimulus package, that may be designed to boost growth ahead of 2019 elections and to to prime the pump, as they say. Given extensive spending demands, this may increase efforts to cut spending to pay for it. Distributing any cuts would be difficult.

Still, South African policy makers have limited room for maneuvering. Low growth, limiting the fiscal space, demands for greater spending and redistribution and inflation nearing the central banks uncomfortable zone of around 6% (the upper band of the target range) are just a few obvious (and significant) reasons. These same inflation trends are creating wage increase demands that companies including power conglomerate  Eskom, and other public and private corporations are struggling to meet.

On the fiscal side, all the politically easy cuts have been made and expenditure switching is challenging, particularly in the case of limited growth. Further cuts to infrastructure, a policy applied damagingly by the Zuma government, would hit both future and current growth. Meanwhile, major issues linger about the financing and viability of state-owned enterprises (SOE’s) that also carry sizeable contingent liabilities.

Ramaphosa and his team are well aware of the vulnerabilities – low productivity, limited flexibility in the local non-tradeable market, significant inequality, high unemployment high (over 25%) – there have been no shortage of good economic plans developed for South Africa over the years. Will new investment plans and recent good will (and high polls for the ANC) buy time for implementation?

Foreign Sovereign Investors Are Welcome

Looking to attract some long-term capital, Ramaphosa secured pledges to invest of $10 billion from both the United Arab Emirates and Saudi Arabia, the latter of which focused on investment in the power sector, especially solar installations, which have been a major focus of its pledges recently. China also pledged over $13 billion dollars, though it remains to be seen whether these funds are loans from its development banks or investments from its corporations – it is likely to be the former.

Attracting long-term investment is key to helping redress infrastructure shortages in transport and power infrastructure. So too would be greater investment in education, especially life-long learning to help redress inequalities throughout the country. The funds, if implemented, might be a step in the right direction for South Africa,  although much more would be necessary.