There is something pleasantly bizarre about the situation SA finds itself in. It seems more in favour with international investors than it has been for a while.
That’s despite floods, load-shedding, collapsing port and rail systems and record unemployment at home. And it’s despite doom and gloom abroad. This narrative, emerging from this week’s IMF spring meetings, has been relentlessly negative, with the IMF cutting growth and hiking inflation forecasts.
It’s warned of the worldwide spillover effects of the war in Ukraine and of how difficult it will be for policymakers to tackle inflation while safeguarding economic recovery and the poor. It’s warned too of the risks rapidly rising US interest rates will pose for emerging markets, which face tighter financial conditions and higher risks of capital outflows.
Yet amid the fear and risk aversion in global markets, SA hasn’t been looking too bad. What was meant to be a moment of significant stress for all emerging markets isn’t proving to be one for SA. On the equity market, the JSE has seen net foreign inflows for the year to date after three years of very large net outflows. SA equities have outperformed emerging market indices over the past few months, and recently outperformed advanced markets as well. JSE CEO Leila Fourie in March reported after a roadshow to the UK and US that “everyone we spoke to was planning a trip down to SA to look at opportunities”. Other listed companies reported similar enthusiasm.
On the currency market, the rand has held up more strongly than anyone might have expected. It’s still one of the best performing emerging market currencies, even though it’s fallen back below R15, from a best level of about R14.50 in March. And though bond markets have been an uncertain place at a time of war in Europe and rising US yields, SA managed last week to place $3bn worth of 10-year and 30-year dollar bonds in the international market, in a transaction the Treasury hailed as an expression of continued investor confidence.
Part of the story is simply a relative one: SA is the proverbial last man standing in its region, the last investible destination in its emerging market time zone. Russia is uninvestable. Turkey, with an inflation rate of 52%, is all but uninvestable. Ukraine is out. So is Egypt, with its heavy reliance on imported wheat. Emerging market fund managers who focus on the “CEMEA” region have few options. And not only does SA look a lot less ugly than many of the others, but as a commodity exporter it’s been benefiting from soaring global prices and improving terms of trade. So while it hasn’t attracted big inflows, it hasn’t seen big outflows either.
The commodity story is one SA shares with big Latin American investment destinations, which is why the rand is up there with the currencies of Latin American countries such as Brazil, Chile and Colombia, currently investors’ favourites among emerging markets. War in Europe has driven up global oil and food prices, fuelling inflation in SA as elsewhere, but the story of the past couple of years is how the prices of SA’s mineral exports (platinum, iron ore, coal, gold) have risen faster than the prices of its imports. That means its terms of trade with the rest of the world improved — and there tends to be a direct correlation between SA’s terms of trade and its exchange rate. The strengthening of the rand is itself one of the reasons equity market investors have been favouring SA, because it helps the JSE’s performance in dollar terms.
The stronger rand has also helped moderate the effect of global price rises on inflation, and SA’s inflation and interest rate story is proving another attraction for investors. The inflation rate jumped to 5.9% in March and is expected to breach 6% soon, with the SA Reserve Bank having upped its forecast for the year’s average to 5.8%. But compare that with the IMF’s latest projection of 5.7% for advanced economies and 8.7% for emerging and developing economies, and SA looks quite virtuous. That’s even more the case with core inflation, which is still well under control — prompting a Goldman Sachs economist to ask the Bank’s Chris Loewald on a webinar this week whether this “South African exceptionalism” would continue.
The Bank is getting credit from investors for acting early to start raising interest rates to combat expected higher inflation, and its credibility provides support for the rand. Investors are giving SA’s fiscal policymakers some credit too, for holding the line on spending and not squandering too much of the commodities revenue windfall, even if the public debt is still too high. They are even persuaded that the government’s moves on broadband spectrum and renewable energy are the start of a reform process that’s long been promised.
“It’s a very interesting environment because a lot of people are quite constructive on SA in a way they haven’t been in a long time,” reports the Treasury’s head of asset and liability management, Duncan Pieterse, after last week’s bond roadshow. He says the issue attracted quality long-term investors.
But while the Treasury is happy with the rates at which it borrowed, some in the market question whether it paid too much, particularly for the 30-year bond, and why it felt the need to go to the international bond market at all when it didn’t necessarily need to right now. Part of the answer is that rates could get far worse. But it’s surely the case too that, costly as it is, the Treasury doesn’t quite believe the good times will last that long. It is probably locking in the funding, costly as it is, while the going is good for SA.
A downturn in the commodities cycle would be a huge risk, to the rand and inflation and to the public purse. But so too is the fact that for all the “SA exceptionalism” in financial markets now, SA’s real economy structural problems are as profound as ever. Foreign investors are offering a window to fix these, not a licence for complacency.
• Joffe is editor at large.
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