South Africa’s Rotating Blade Damage
South African shares preserved a modest MSCI uptick through mid-year as President Zuma’s second term team pared back GDP growth estimates to 2 percent on another mass worker walkout, and ratings agencies warned quasi-sovereign Eskom could lose investment-grade standing barring large funding injections and tariff hikes. Global investors maintained local bond exposure to bridge the 5 percent of GDP current account hole as popular opinion remained transfixed on the Pistorius “blade runner’’ murder trial and comparisons between the country’s 2010 hosting and current conduct of the World Cup competition in the context of larger BRICS rivalry now extending to headquarters and management control of their new development bank. The central bank has been on rate hold despite inflation nearing 7 percent as the fiscal outlook remains squeezed by the combination of foregone production and higher promised social spending. The power utility faces an imminent S&P downgrade unless it gets a $2 billion recapitalization and at least a 10 percent rate increase from the independent regulator, according to experts. The budget shortfall could widen to 5 percent of output over the medium term, endangering a two-decade reputation for prudence should capacity and operating weaknesses persist and the National Development Plan the ANC campaigned on keep its expensive education and health commitments. VAT hikes are likely in the next budget blueprint to offset the outlays, which could further erode consumer sentiment already burdened by debt. The load has decimated the stock price of unsecured lender African Bank expected to merge with a competitor to stay afloat. Portfolio inflows have temporarily stabilized the rand at 10-10.5 to the dollar, but fundamental volatility could resume on diminished Chinese precious metal demand and the inability of thin reserves to smooth fluctuations. Radical ruling party factions have severed ties altogether in some cases and urged tighter capital controls along with government intervention in the mining and other strategic industries. Pre-election legislation in this direction has been softened since Zuma’s decisive victory but he continues to hint at “bold, historic” valedictory policies in part to deflect scrutiny over lingering corruption investigations. The populist potential along with negligible rebalancing has frozen the “fragile five” label in place as the rest of last year’s group progressively sheds it, with even reluctant Turkey bowing to market monetary tightening preferences. Johannesburg’s business and financial community did not see allies appointed to the new cabinet and are in doubt over the true intentions of the ANC’s deputy leader despite his prolific past black economic empowerment deal-making.
They are also disturbed by prospects in neighboring Botswana and Zimbabwe, both in the negative MSCI frontier column after early year decent performance. Agriculture and diamond exports have been mixed in the former and President Mugabe allegedly in declining health has not yet named a successor and recently reiterated his indigenization mandate to consider outright foreign ownership seizure. Through end-June only Kenya showed a double-digit Africa advance as it ignored terrorist incidents with the Nairobi exchange powering its own listing.
