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The situation is worse than expected

31 July 2019 Jonathan Faurie
Herman van Papendorp

Herman van Papendorp

South African politics is far from dull. The fractures within the African National Congress (ANC) were once again highlighted at the end of July when ANC Secretary General Ace Magashule accused former cabinet minister and ANC NEC member Derek Hanekom of being a charlatan and a wedge-driver.These accusations were sparked by a meeting between Hanekom and the Economic Freedom Fighters (EFF) to hatch a plan to support a vote of no confidence against Former President Jacob Zuma.

How does this political circus affect the financial services industry? 

Speaking at the recently held Momentum Investments Roadshow, Herman van Papendorp – Head of Macro Research and Asset Allocation at Momentum Investments – pointed out that the South African circus (where there is an abundance of clowns and very few ringmasters) has a direct impact on investor confidence. 

Stuck in a hole

The news that the South African economy is in the doldrums and is struggling for growth is not news to anyone who is trying to earn a living. However, Van Papendorp says that the situation is worse than expected. 

“South Africa is stuck in a hole. The growth of the economy has not surpassed the growth of the population for five and a half years now. This is concerning because we are looking at the possibility of years of negative economic growth and not quarters if we do not resolve this situation with some urgency. Politics drives confidence, confidence drives economic growth,” said Van Papendorp. 

Africa rising

What is even more concerning is the fact that this is coming at a time when the rest of Africa is cashing in on the fact that there is heightened interest in emerging economies. 

Countries like Mauritius, Rwanda and Morocco all rank above South Africa when it comes to ease of doing business. This is driven by economic policy. 

“In 2016, Rwanda was ranked 143rd in the world and Morocco was ranked 130th in the world when it came to the ease of doing business. At that time, South Africa was well ahead of these nations in 32nd place. In three years, Rwanda improved its position to 29th in the world and Morocco improved its position to 60th in the world. South Africa slipped to 82nd in the world. This is concerning,” said Van Papendorp. 

He added that it takes three business days to apply for and get permission to open a business in Rwanda. In South Africa, it takes 54 working days to achieve the same result. This is largely because of the effort associated with getting electricity permits and connections for the business. 

When this is taken into consideration, which company would want to invest in South Africa and which investors would go all in when it comes to investing in South Africa Inc? 

Easy wins and the long road

This is scary stuff, but does it mean that it is all doom and gloom for South Africa?  Not necessarily if one considers the optimism that has grown around the election of President Cyril Ramaphosa and his no-nonsense approach when it comes to corruption and fiscal policy.  

“There are some easy wins that will almost immediately benefit the South African economy. Government needs to ease its visa regulations so that foreign entrepreneurs will become interested in South Africa. Government needs to work hard at improving the broadband spectrum which will improve our digital economy and decrease data prices. Finally, government needs to cut port and rail charges as well as improve efficiency in this area. The cost to handle goods at a South African port is almost double that of a port in developed countries and it takes three times as long to process the goods for export or to clear customs,” said Van Papendorp. 

There are harder challenges that will take longer to address. These include improving the profitability and sustainability of State Owned Enterprises (SOEs), encouraging trust that will be the corner stone of public private partnerships, and the rehabilitation of the public sector which will include addressing its huge wage bill. This is something that labour unions are vehemently against. 

Investment implications

Van Papendorp pointed out that there are a lot of investment implications that are associated with a radical recovery from South Africa’s situation. 

  • The high road. This is where there is aggressive and radical policy reform. This will create a situation where the value of growth assets will outweigh the value of defensive assets;
  • The middle road. This is where there is some policy reform. This will create a situation where there is an ebb and flow of asset class returns; and
  • The low road. This where the value of defensive assets will outweigh the value of growth assets. 

So how do advisers and fund managers cope with whatever recovery road South Africa takes? “Diversification is key. Do not put all your client’s eggs in one basket. They need to stay the course and value time in the market over timing the market. Finally, advisers need to recommend alternative asset classes,” said Van Papendorp. 

Editor’s Thoughts:
The options available to improve the economy comes down to willingness. Is there political will to take the high or middle road to recovery? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Johan du Toit, 31 Jul 2019
Sadly, in 25 years of ANC government, the focus initially was on the abuses of Apartheid...they have not moved on from there...there is still reference to those bad days.
Is it not time to refocus on good fraudlessness, corruptionlessness, government and start putting the people first, the people... the politicians are supposed to serve?
They are there for us, to create an environment where everyone will prosper, have a job, can get on with building our country....
Truly we are in the hands of the grasshoppers...and you know what grasshoppers are capable of doing....they leave nothing behind....
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Added by Paul Chinchen, 31 Jul 2019
For as long as government is wedded to socialism and shuns capitalism the downward spiral continues.
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