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.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
-
What happens if you can’t pay your tax bill, and what is "Time to Pay"?
Millions are due to file their tax return this Friday as the self-assessment deadline closes. Though the nightmare is not over until you pay the taxman what you owe - or face a penalty. But what happens if you can't afford to pay HMRC your tax bill, and what is "Time to Pay"?
By Kalpana Fitzpatrick Published
-
What does Rachel Reeves’s plan for growth mean for UK investors?
Rachel Reeves says she is going “further and faster” to kickstart the UK economy, but investors are unlikely to be persuaded
By Katie Williams Published
-
What’s the outlook for the shipping industry in 2025?
All we know for certain about the year ahead is that it will be volatile. But the container shipping sector thrives on choppy waters
By Rupert Hargreaves Published
-
What investors can expect from stocks and the economy in 2025
There are reasons for investors to be hopeful about 2025, with slowing interest rates and moderating oil prices. But trouble may be brewing in bond markets
By Alex Rankine Published
-
Why Wise could be worth a lot more than its share price implies
Foreign-exchange transfer service Wise has the potential to become the Amazon of its sector – here's why you should consider buying this stock now
By Jamie Ward Published
-
How did emerging markets perform in 2024?
Emerging markets underperformed their developed counterparts in 2024, but there are signs of recovery. We look at the biggest winners and losers of 2024, and the key trends shaping these markets
By Alex Rankine Published
-
Can The Gym Group pump up your portfolio?
Gym Group was one of the best UK small-cap stocks in 2024 and will beef up your profits this New Year
By Rupert Hargreaves Published
-
MoneyWeek's five predictions for investors in 2025
MoneyWeek's City columnist gazes into his crystal ball and sees five unexpected events in store for investors in 2025
By Matthew Lynn Published
-
How buy-and-build stocks deliver strong returns
Bunzl, DCC and Diploma became successful through buy-and-build – rolling up dozens of unglamorous businesses. How does it work and what makes it successful?
By Jamie Ward Published
-
Singapore Technologies Engineering shows strong growth
Singapore Technologies Engineering offers diversification, improving profitability and income
By Dr Mike Tubbs Published