South Africa is back in reform mode. President Cyril Ramaphosa came to power in 2018 vowing to clean up the endemic corruption and economic mismanagement that took root under predecessor Jacob Zuma. Yet the pandemic and internal power squabbles in the governing African National Congress (ANC) have distracted him.
The economy, which had been ailing even before the coronavirus arrived, contracted by 7% last year; almost one-third of the country’s workforce is unemployed. Moribund state-owned electricity provider Eskom imposes periodic power cuts. That doesn’t just make life inconvenient, it also disrupts activity at industrial operators and mines that are crucial for the economy.
Things are looking up
Ramaphosa has shored up his position within the ANC in recent months and now has more freedom to reform, say Michael Cohen and Prinesha Naidoo on Bloomberg. The government has sold its majority stake in the national airline and taken steps to liberalise energy markets so that businesses are not left at the mercy of Eskom. It is also trying to get on top of the power utility’s crippling debts.
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Financial markets have cheered up. The rand has been the best-performing emerging market currency this year, recently hitting a two-year high against the US dollar. The benchmark FTSE/JSE Top 40 index has gained more than 12% so far this year and is up by 19% since the start of 2020.
The bounce is mostly due to the commodity boom, however. As Craig Mellow notes in Barron’s, South Africa produces “80% of the world’s platinum group metals”. The metals have hit six-year highs because of strong global industrial demand. Local stocks are heavily exposed to global commodities: materials account for 24% of the MSCI South Africa index, twice as much as in the UK.
The South African Chamber of Commerce and Industry reports that business confidence hit its highest level in more than three years last month, says News24’s Lameez Omarjee.The economy grew at an annualised pace of 4.6% in the first quarter, faster than predicted. Yet GDP is only expected to return to pre-pandemic levels in 2023.
A third wave of Covid-19 infections is taking hold as the country enters the southern hemisphere’s winter, causing the government to introduce new restrictions. While the recovery is “export-led”, the outlook for the domestic economy remains far more uncertain.
South African stocks have underperformed for a long time, says Mellow. In dollar terms the market has made little progress since 2005. The economy has undeniable problems. Yet Ramaphosa is running “a tight fiscal ship”. Provided the metal-price rally holds, the stockmarket’s outlook remains encouraging.
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