Electric shock in South Africa – can stocks bounce back?

Power cuts in South Africa are reminder of the mess Jacob Zuma left the country in. Cyril Ramaphosa still has plenty to do.


"After an impressive January, South Africa turned into the sick man of emerging markets in February," says Craig Mellow on Barron's. The MSCI South Africa index lost 7% , compared with a 1.5% dip in emerging markets in general. Meanwhile, the South African currency, the rand, lost 5% against the dollar.

The immediate problem was a series of power outages caused by state-owned utility company Eskom. South African homes and businesses endured scheduled power cuts to prevent a collapse of the overstretched electricity grid. Eskom's debt ballooned to 10% of national GDP under the corrupt former president Jacob Zuma. Its debt-servicing costs are almost twice its free cash flow. As it battles to meet demand, it has warned that "it could run out of money by April, defaulting on its vast debt", says the BBC.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

The episode is a stark reminder of how much trouble South Africa got into under Zuma and how much work his successor Cyril Ramaphosa, who faces an election in May, has to do to clean up the mess. The "cautious, some might say crawling, pace" of political change adopted by Ramaphosa is a broader worry. "The market wants action yesterday, but given the political calendar, the government can't deliver right now," Kaan Nazli, senior economist at investment management group Neuberger Berman, told Barron's. And while Ramaphosa is clearly a vast improvement on Zuma, it's becoming increasingly clear that tackling corruption is a monumental long-term challenge, says Eoin Treacy of Fuller Treacy Money.

It hardly helps that South Africa's commodities-based growth model faltered when gold and platinum prices crashed five years ago. Lacklustre growth means it can't make a dent in its unemployment rate of 27%. It also priced itself out of the manufacturing market because of its high wages. A debate on constitutional changes that will enable the government to take land without compensation is the latest development to unnerve investors.

Advertisement - Article continues below



Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Investment strategy

Beware the hidden risks when investing in emerging markets

Emerging markets look cheap compared with developed countries, but earnings may be less trustworthy.
23 Dec 2019

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Emerging markets

Emerging markets: buy when the news is bad

Emerging markets are being squeezed by local turmoil and by more general factors. But bad news can spell opportunity for investors.
5 Nov 2019

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020