South Africa’s Twin Twinge Tweaks
South African stocks continued to slump on a gloomy World Bank report citing double damage from the Eurozone crisis and metal export falls for mere 2.5 percent GDP growth this year against the Sub-Saharan average at twice that result. The country was among the ten most hit by commodity price drops with lagging power and labor capacity aggravating the crunch. Unemployment is stuck at 25 percent and without transfer programs per capita-income would be lower than at independence for the poorest, according to the institution. Despite the jobless rate unions are again pressing for double-digit wage hikes in the latest collective bargaining round versus the government’s 7 percent counter. Inflation is around 5.5 percent and the central bank shifted its holding pattern with a 50 basis point cut in July to boost domestic demand even as rand weakness begins to separately affect prices. The currency change will also pare foreign investor bond overweight positions needed to balance the 5 percent of GDP current account gap following $2 billion in June inflows. To diversify the base, the Treasury is preparing a debut sukuk aimed at Middle Eastern buyers with Gulf underwriters. The budget envisions $3 billion in medium term placement and the Finance Ministry has promoted the structure as a mechanism for attracting non-Western portfolio and direct investment. The pilot will use the ijara special purpose vehicle method also under consideration in neighbors with large Muslim populations, including Nigeria and Kenya. The latter remains the region’s top performing equity market as the central bank there recently too slashed rates to 16.5 percent, and the government obtained a $500 million syndicated loan for reserve reinforcement to tackle the 10 percent of GDP current account deficit. The shilling is at 85 to the dollar but expected to depreciate on political anxiety six months before the next presidential elections, with tribal-based contenders closely associated with previous outbreaks of violence. With a break in monetary tightening bank private sector lending should resume and translate to listing appeal, as Equity Bank and Kenya Commercial have moved aggressively into underserved micro-segments and build East Africa-wide networks. Oil discoveries have also been upgraded as the UK’s Tullow operates a joint venture with China’s CNOOC.
The Bank of China just received permission to open a Nairobi office as the triennial Africa forum took place in Beijing with President Hu Jintao pledging “steadfast commitment” along with $20 billion in loans and culture and education exchanges. Bilateral trade was $170 billion in 2011 focused on raw materials from the continent and Chinese low-cost electronics and textile imports. $15 billion in inward investment the past decade has targeted infrastructure, but South African President Zuma at the conference described the long-term pattern as “unsustainable and dictating caution,” a phrase also reflecting homeward truths.
