South Africa is running out of time to reform its economy

Unless South Africa institutes economic reforms, including greater fiscal discipline, a clampdown on corruption, and easing labour laws, it risks losing its status as an investment destination.

Cape Town, South Africa © iStockphotos

South Africa: a reform story endlessly sketched out, but never written

"Cyril Ramaphosa is running out of time to reform South Africa," says The Economist. The country was "ravaged" by years of corruption under his predecessor Jacob Zuma.

Ramaphosa must take on the cosy world of "pampered industries" protected from genuine competition, "cushy labour laws" that help cause a 29% unemployment rate and public servants who "do little but... embezzle". Yet his consensus-first approach suggests that he prefers to give in to vested interests rather than taking them on.

GDP in Africa's most industrialised country fell for the second time this year in the third quarter, prompting renewed talk of impending recession, says Roxanne Henderson on Bloomberg.

Indeed, South Africa risks losing its status as an investment destination altogether, says James Formby of Rand Merchant Bank in Johannesburg's Business Day. The solutions are clear: greater fiscal discipline, a clampdown on corruption, easing labour laws and reforming the power grid. Politicians must realise that "it's no longer five to midnight, it is midnight".

Moody's is the last credit-rating agency to grade South African sovereign debt above junk status, notes David Pilling in the Financial Times. A downgrade, and higher interest payments, would only worsen a shaky fiscal position, with public debt moving towards 70% of GDP. Energy monopoly Eskom's "clapped-out" power stations and creaking grid cannot ensure reliable power.

The firm's $30bn debt is worth 9% of the country's entire GDP, while 55% of its money is spent on "bloated coal contracts" negotiated by government cronies. Ramaphosa is "loath to take on the vested interests" that helped him gain the presidency, but if he doesn't "Eskom will drag the country down with it".

The eternal reform story

The gloom is weighing on the stockmarket. The country's FTSE/JSE Top 40 benchmark is up 11.5% so far this year, about half the global average equity performance. On a price/earnings ratio of 13.3 the market appears to offer value. But we have been here before.

South Africa is a "reform story endlessly sketched out but never written", says Buttonwood in The Economist. Years of commissions into how to unleash growth have yielded little real reform. The country still enjoys a certain "residual appeal".

Key institutions such as the central bank and treasury are well run. Ironically, the nation's well-run companies operate in such oligopolistic conditions that they are often immune to broader economic trouble. Yet investors often choose to be "tactical" buying in for short periods when they think markets have got carried away. In the long term, "few are valiant enough to be outright bullish".

Recommended

Inflation, energy crisis, strikes – have we gone back to the 1970s?
Investment strategy

Inflation, energy crisis, strikes – have we gone back to the 1970s?

Merryn and John talk about rising prices, productivity and the state of the labour market, plus are bond investors really the adults in the room, and …
15 Oct 2021
When will supply chains sort themselves out and what might that mean for inflation?
Inflation

When will supply chains sort themselves out and what might that mean for inflation?

Right now, congestion in global supply chains is driving inflation higher. At some point, that will sort itself out. So will that mean an end to high …
15 Oct 2021
Emerging-market central banks take on inflation
Emerging markets

Emerging-market central banks take on inflation

Central banks in Poland, Russia, Mexico and Brazil have been raising interest rates to get ahead of global inflationary pressures.
15 Oct 2021
India: the next global growth engine
Emerging markets

India: the next global growth engine

India's stockmarket is booming, up by 37% so far this year, and the BSE Sensex index has delivered an annualised return over the last five years of mo…
15 Oct 2021

Most Popular

How to invest in SMRs – the future of green energy
Energy

How to invest in SMRs – the future of green energy

The UK’s electricity supply needs to be more robust for days when the wind doesn’t blow. We need nuclear power, says Dominic Frisby. And the future of…
6 Oct 2021
Inflation is still one of the biggest threats to your personal finances
Investment strategy

Inflation is still one of the biggest threats to your personal finances

Central bankers and economists insist inflation will be gone by next year. We're not so sure, says Merryn Somerset Webb. So if you haven’t started to …
1 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021