The prospect that SA could be greylisted is one of the negatives already priced into the risk premium investors attach to SA asset prices.
But the bad news is overpriced and this represents an opportunity for SA if it can deliver on the reforms it has promised, said Standard Bank group CEO Sim Tshabalala.
The bank’s research shows SA equity valuations are now in the cheapest territory since the global financial crisis of 2008/2009 and are “overly discounting bad news”, with earnings expected to outpace those of other emerging markets whose equities are more highly valued.
The same goes for SA bonds, which Standard’s SBG Securities argues offer compelling real yields.
In an interview in Washington last week, Tshabalala said the greylisting issue had not come up in the conversations he had had with correspondent banks in the US over the past two weeks, because Standard had been working with them on the issue over the past year or more.
“We have to prepare for the worst but pray for the best,” said Tshabalala, who warned in July that greylisting by the Financial Action Task Force would be worse than a sovereign credit downgrade.
“It’s a tragedy that this should ever have been a problem; the country risk premium could be significantly lower without the greylisting issue and this would mean the cost of living would be lower, the value of the rand stronger and it would be easier to raise money,” he said.
SA needed to continue with its structural reform programme and strengthen its law enforcement agencies and its institutions.
He said, however, that investors were starting to acknowledge the progress that SA was making on reforms, and this was reflected in the inflows to the equity and bond markets over the past couple of months.
Tshabalala was speaking on the sidelines of the annual meetings of the International Institute of Finance (IIF) in Washington, DC, last week.
The IIF, which is the global association of the finance industry, traditionally holds its meetings to coincide with those of the IMF each year.
Tshabalala was re-elected vice-chair of the IIF, which elected a woman as its chair for the first time, Banco Santander’s executive chair Ana Botin.
Standard and the JSE also hosted an investor session in New York last week that was a smaller version of the annual SA Tomorrow event.
In a presentation in New York, SBG Securities’ Deanne Gordon said returns in the mid-teens for SA equities and SA bonds should outpace emerging markets.
SA was a safe haven within emerging markets, benefiting from still elevated trade, a lift in fixed investment, steady fiscal improvement on mining, relative underweight positions by investors in SA assets, and the fact that SA earnings growth momentum was greater than that of other emerging markets.
“Even factoring in a very pessimistic growth outlook, we estimate that the equity market is overly discounting bad news, having de-rated by about 50% since 2015,” she said. “SA punches above its weight in terms of corporate earnings delivery.”
Tshabalala told a panel at the IIF that the fact that earnings growth was strong despite low economic growth was testimony to SA business leaders and management knowing how to manage in high inflation, high interest rate environments with dislocated supply chains.
Gordon said the flow of funds into SA equities was starting to turn positive, with foreigners net buyers in 2022. Foreign bond flows into SA, Mexico, Brazil and Indonesia had picked up since June. The rand too gets more commodity support than most peers and was in undervalued territory, she said.
SBG is upbeat on fixed investment spending as well, forecasting growth in fixed investment picking up from 4.3% in 2022 to 4.8% in 2023 to 6.6% in 2024, driven particularly by private sector investment in energy infrastructure. With progress on reforms in energy, broadband spectrum and water, Tshabalala said the pipeline of infrastructure investment projects had never been stronger.
On SA’s $8.5bn climate finance talks, he said the issue was how to leverage the $8.5bn to $80bn working with the financial sector. Part of the discussion at the IIF was what should policymakers be doing to put structures in place to create blended finance outcomes, he said.
The World Economic Forum has estimated SA would need $250bn in the next couple of decades to wean itself off coal.
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