South Africa has pulled itself from the brink of economic oblivion. For now.
The resignation of President Jacob Zuma last month amid mounting accusations of corruption and mismanagement has rekindled confidence in a country that had been all but written off as a basket case. The rand has since rallied to its strongest in two years against the dollar and the country’s borrowing costs have dropped as investors bet the administration of successor Cyril Ramaphosa would stave off another downgrade of the country’s debt.
Even so, South Africa isn’t in the clear. Unemployment remains doggedly high at about 27%, gross domestic product growth is benign and the country’s public services have been left in tatters by years of graft. Further deepening investor caution, a parliamentary vote to seize farmland from white owners without compensation reminded the world that the country once ruled along brutal racial lines remains at the mercy of deep-seated grievances that could push it back into the abyss.
“There’s a significant amount of unease and unresolved questions about the decades of segregation, and the fact that that hasn’t been resolved yet makes South Africa a potential time bomb,” said Jeremy Gorelick, a Pretoria-based senior adviser to the US Agency for International Development and professor of finance and economics at the John Hopkins University in Baltimore.
“But I think there’s enough investor confidence in the direction things are going and there’s confidence that it will continue in the same vein.”
Ramaphosa carries the hopes of global investors as well as the country’s 52 million inhabitants. But the optimism he’s inspired is so far borne largely from the fact he isn’t Zuma.
Economic Decline – Part of the Past
The disgraced former leader presided over an economic decline that brought into disrepute the ruling African National Congress — the party of Nelson Mandela and which fought and overthrew apartheid. His personal dealings with a wealthy family headed by the Indian-born millionaires Ajay, Atul and Rajesh Gupta stoked accusations of corruption that undermined the legitimacy not only of his government but also that of the country as an investment destination.
Ramaphosa’s accession to the presidency has offered early hints that the nation has turned a corner.
On the day Zuma stepped down, police launched a surprise raid on the Guptas, arresting them for improper dealings and signalling the new administration would clamp down on corruption.
And in the highly anticipated first budget under the new administration, Finance Minister Malusi Gigaba announced plans to increase taxes and curb spending. It won applause from investors and led analysts to suggest the measures may be enough to prevent Moody’s downgrading the country’s debt to junk.
Such a move would only be symbolically significant, given that all other major rating agencies have already given South African bonds a speculative ranking.
“I am of the opinion that Moody’s will indeed not downgrade SA’s local government bond rating to sub-investment grade,” wrote Rian le Roux, strategist at Old Mutual Investment Group. “This view goes beyond merely the better budget projections. Cyril Ramaphosa… brings the promise of a confidence recovery, greater policy certainty, a clampdown on corruption, reinstating the independence of our institutions, drastic action to turn around financially troubled state-owned enterprises and, ultimately, the prospect of faster economic growth, more jobs and a rising living standard for all.”
Innovative Finance in South Africa
Gorelick points to other less tangible signs of optimism.
He’s been contacted, he said, by institutional investors newly keen to diversify their portfolios into South African assets and adds that this year’s iteration of an annual debt conference will be attended by more overseas investors than he’s seen in the past four years.
He’s also confident the nation’s finance chiefs are innovative enough to find ways to bring investment to the hinterland, pointing to two green bonds issued by the municipal governments of Johannesburg and Cape Town as examples.
“We know there can be external or internal shocks that are going to negatively impact the view people have of the country, but the way things look for the foreseeable future is that things are going to improve,” he said.