DJ Optimism Fades as South Africa's Debt Jumps -- Barrons.com
By Craig Mellow
After an impressive January, South Africa turned into the sick man of emerging markets in February.
The iShares MSCI South Africa exchange-traded fund (ticker: EZA) has lost 7% this month, against a 1.5% dip in global emerging markets. Its currency, the rand, is off 5% against the dollar.
A Feb. 20 budget presentation by Minister of Finance Tito Mboweni only compounded the gloom. He cut an already anemic 2019 growth forecast to 1.5%, and projected budget deficits around 4.5% of gross domestic product for the foreseeable future. "While I never expected a positive budget speech, there was significantly more slippage than expected," says Schalk Louw, a portfolio manager at PSG Wealth in Cape Town.
The proximate cause of South Africa's downturn has been power outages that highlighted the financial woes of state utility Eskom, whose debt ballooned to 10% of national GDP under disgraced former President Jacob Zuma. Eskom's debt-servicing costs are nearly twice its free cash flow, calculates Sandy McGregor, a portfolio manager at Africa-focused wealth manager Allan Gray.
The broader issue is the cautious, some might say crawling, pace adopted by current President Cyril Ramaphosa in cleaning up the multifarious mess that Zuma left behind. Ramaphosa, who unseated Zuma as African National Congress chairman by a whisker in late 2017, has prioritized holding the fractious ruling party together at least until elections this May. "The market wants action yesterday, but given the political calendar, the government can't deliver right now," says Kaan Nazli, senior economist for emerging markets debt at Neuberger Berman. Ramaphosa's position on Eskom is typical -- demanding budget cuts, but without layoffs.
The president won't have a magic wand after the expected ANC victory, either, McGregor warns. South Africa's commodities-based growth model fizzled after prices for exports like gold and platinum crashed from 2012 to 2014. But it substantially priced itself out of manufacturing investment with wages that have grown 30% faster than GDP for the past decade. Moves toward competitiveness confront labor unions, which remain a cornerstone of the ANC coalition, and statist reflexes that stymie even common-sense measures like easing visa restrictions for skilled foreign workers. "I'm skeptical about reforms accelerating postelection, " McGregor says. "South African business is tied up by bureaucracy."
Nor will markets necessarily wait patiently until May. Moody's, the only global credit agency that still ranks South African's sovereign debt as investment grade, is due to revisit that judgment in late March. The investor consensus is that Moody's may shift its outlook to negative without actually downgrading. But a surprise downgrade to junk status would force global fixed-income funds to withdraw $10 billion from the market, or about a quarter of the country's currency reserves, Nazli says.
Ramaphosa's go-slow politics has its benefits. He has defused, for now, the explosive issue of land redistribution, delegating it to open-ended blue-ribbon commissions while emotions have a chance to cool. Investors are hopeful for an eventual compromise that focuses on state land giveaways, while leaving the country's critical crop-export sector little harmed. Where the president has moved, it has been in the right direction, installing respected professionals at Eskom and other woebegone arms of the state.
"South Africa needs one thing to reverse its problems, and that is confidence," local investor Louw says. "Any possible improvement can bring about a massive reversal to a value market." It's hard to see the trigger for at least the next few months, though.
(END) Dow Jones Newswires
February 22, 2019 11:14 ET (16:14 GMT)
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