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Why there is good reason to be positive on South Africa

25 April 2023 Schroders
Andrew Rymer

Andrew Rymer

Robert Davy

Robert Davy

Andrew Rymer, CFA - Senior Strategist, Strategic Research Unit at Schroders, and Robert Davy - Emerging Market Equities Fund Manager

South Africa is beset by long-term and near-term challenges, most notably an ongoing power crisis, but we think that it’s not all doom and gloom for investors in the country.

South Africa’s economy faces an array of structural challenges, and the need for reform is as urgent as ever. The power crisis is becoming increasingly severe, with loadshedding, or electricity rationing, at record levels. Going into the southern hemisphere winter, when demand rises, power pressures could hit a new high.

Added to the long-term structural issues is the slowing cyclical picture for the economy. Commodity prices are falling as the external environment deteriorates, while domestic demand remains weak, hampered by power shortages and rising inflation and interest rates. Against this backdrop, companies across a range of sectors have announced earnings downgrades.

One of your authors (Robert) was in South Africa to meet with companies in March and felt that the mood was as pessimistic as he can remember in several decades of visiting the country. Despite this gloomy backdrop, we think there is good reason to be positive towards South Africa.

Look through the weak 2023 growth outlook

GDP growth for Q4 2022, released in March, slowed more sharply than expected to 0.9% year-on-year (y/y). On a quarter-on-quarter basis, GDP was down -1.3%. The increase in blackouts through the period, as the electricity situation deteriorated, weighed on broad activity. Last year was the worst on record for loadshedding in South Africa and it may have been even more severe in Q1 of this year.

GDP growth expectations for this year are now sub 1%, with power set to remain a constraint on activity. The higher interest burden for households, following 18 months of policy tightening, is weighing on consumption. Meanwhile the commodity price outlook has weakened as the global growth outlook has moderated. The outlook into 2024 and 2025 looks more optimistic though, amid signs of improvement on the horizon for electricity supply, and as the global economy is expected to recover.

Inflation ticked up slightly to 7.0% y/y in February. Although it has been trending down, it remains above the central bank’s target range of 3-6%. South Africa’s Reserve Bank has lifted the policy rate by a total of 4.25 percentage points to 7.75% since the end of November 2021. The 50bps hike in March surprised the market, but the hiking cycle appears to be peaking. Inflation should resume its move lower in the coming months as base effects ease. A fall in food price inflation would also be beneficial.

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