South Africa faces a big economic storm

Recession hit South Africa has been the fifth-worst hit country in the world measured by the number of coronavirus cases. The local stockmarket has so far dodged the worst of the fallout, but worse may be to come for its economy.

“The storm is upon us,” says South African president Cyril Ramaphosa. Already in recession before the pandemic hit, South Africa has been the fifth-worst hit country in the world measured by the number of coronavirus cases. Last week the International Monetary Fund approved an emergency $4.3bn loan to Pretoria, its biggest pandemic-related disbursement yet. 

South Africa’s prompt April lockdown ushered in a period of “Ramaphoria”, says Ivan Fallon in The Times, but there is “widespread disillusion” as a worsening situation has forced new curbs. The first confinement proved economically ruinous, with three million job losses, thanks in part to the closure of the tourism industry, the economy’s biggest employer. The economy is forecast to contract by 12% this year. To top it all, new problems at electricity monopoly Eskom have brought yet more power cuts. 

There was widespread hope that Ramaphosa would prove a reformist breath of fresh air after years of serious corruption under his predecessor, Jacob Zuma. South Africa has been badly served by its leaders of late; real GDP per person has fallen every year since 2015, says The Economist. Rigid labour markets and government debt are pressing concerns, but Ramaphosa is increasingly siding with the statist camp inside his own party, which talks of launching a government bank and pharmaceutical company. “More than a fifth of the budget” will go on paying debt interest this year. The OECD recently warned that the debt could exceed 100% of GDP by 2022 without consolidation, a dangerously high level for an emerging market.

Dodging the fallout

The local stockmarket has so far dodged the worst of the fallout. The benchmark FTSE/JSE Top 40 is up by 2% this year. The country’s leading companies are insulated from the wider economy for a number of reasons. Firstly, over-regulation means that large, oligopolistic companies enjoy significant pricing power, cushioning them from the economic pain. Secondly, as Heather Jackson writes for News24.com, “more than 60% of the JSE’s Top 40 derives its revenue offshore”, leaving local portfolios “relatively underexposed to our real economy”.

Above all, a recent rally has been juiced by soaring commodity prices, says Adelaide Changole on Bloomberg Quint. The materials sector accounts for one-fifth of the MSCI South Africa index, twice as much as on the equivalent UK index. 

On a cyclically-adjusted price/earnings ratio of 15.6 South African stocks are currently dearer than the British market. Yet local companies will not be able to avoid their country’s worsening economic problems forever. Investors should fasten their seatbelts.

Recommended

Imperial Brands has an 8.3% yield – but what’s the catch?
Share tips

Imperial Brands has an 8.3% yield – but what’s the catch?

Tobacco company Imperial Brands boasts an impressive dividend yield, and the shares look cheap. But investors should beware, says Rupert Hargreaves. H…
20 May 2022
What's behind Sri Lanka’s crippling debt crisis?
Emerging markets

What's behind Sri Lanka’s crippling debt crisis?

Sri Lanka has been hit by a triple whammy of economic shocks and has gone to the IMF for a bailout. It may just be the first domino to fall in a globa…
20 May 2022
Investing in drugmakers: uncommon profits from curing rare diseases
Share tips

Investing in drugmakers: uncommon profits from curing rare diseases

Treatments for medical conditions with only a small number of sufferers can still be very attractive for pharmaceutical companies and investors becaus…
20 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022

Most Popular

The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022