Investors flooding out of South Africa
International investors have had enough of South Africa and are taking large sums of their money out of the embattled country.
The City Press reports that over R100 billion in South African shares and bonds have been sold by international investors since the start of 2023.
JC Louw, the CEO of DFM Global, told the publication that this is a clear signal of investor sentiment turning for the worst.
“The pace at which foreign investors are disposing of our stocks and bonds seems to be accelerating,” said Louw.
Louw added that there had been a massive net sale of domestic assets, which is very concerning.
“The net sales are basically a sign that foreign investors are voting with their feet. The power outages, the lack of reforms, the infrastructure problems – all these things put a lot of pressure on the country,” he told the City Press.
The trend also means that foreign investors that need to make asset allocations are taking their money elsewhere – possibly to more stable markets with a higher likelihood of some level of positive returns.
“Apple and Amazon are not affected by load shedding, and if the GDP does not grow, companies in South Africa will not grow either,” said Louw.
Economic growth prospects for the country have been sliding lower and lower. Businesses, small and large, have been racking up millions in monthly bills to pay off alternative energy supplies such as diesel generators, solar panels or inverters.
Major retailers are some of the heaviest hits, with Shoprite, the country’s biggest retailer, reporting that it spends the equivalent of R3 million a day to survive the power cuts. Pick n Pay also loses millions to load shedding, with its ‘permanent new reality’ being an extra R60 million spent each month to keep diesel generators running.
The South African Reserve Bank (SARB) recently adjusted its annual growth estimate for the country’s economy from 1.1% to 0.3%. Despite this severe cut, economists and analysts warn that it will likely be worse.
Load shedding is cited as the leading cause for this revision, with Citadel’s chief economist Maarten Ackerman stating that it is crystal clear that load shedding is the primary cause of all the economic damage as it also exacerbates other structural issues within the economy.
According to an analysis conducted by the SARB, the economy has adjusted to some extent to stages 1 and 2 load-shedding, resulting in lost gross value added (GVA) of approximately R1 million per working day.
However, South Africa has been experiencing stage 4 and higher load-shedding since September 2022, and the economic cost has increased significantly. At stage 4, the estimated daily loss in production rises to about R408 million, and it can go up to as much as R899 million per day at stage 6, said the SARB.
As a result, South Africa is poised to enter a recession. On 8 March, Stats SA published its latest Gross Domestic Product (GDP) data which showed a 1.3% of economic decline in the final quarter of 2022. In the first quarter of this year, alarm bells are ringing as all signs now point to negative growth – a technical recession of two consecutive quarters of economic decline.
Such economic turmoil does not bode well for the country’s reputation abroad. On 9 March, the international ratings from S&P Global downgraded the country’s economic outlook from positive to stable – citing load shedding.
Various other rating agencies have also been keeping an eye on South Africa. A positive credit rating assists the country in signalling to international investors that it has strong business and consumer sentiment, pushing the country to become a more attractive investment opportunity.
South Africa faced a substantial setback in its international reputation in late February, as the Financial Action Task Force (FATF) included the country on its grey list – a list of nations being monitored for their inadequate efforts in preventing money laundering and terrorist financing.
Although being added to the greylist is not expected to cause credit rating agencies to further downgrade South Africa, it does exacerbate already-existing problems, such as load shedding, economic recession, high unemployment rates, increasing civil unrest, delayed government policy implementation, and low business confidence.
South Africa has been in sub-investment grade – known as ‘junk status’ since 2017. Kelin Pottier, a product development specialist at 10X investments, in an exclusive interview with BusinessTech, said there had been a significant outflow of foreign direct investment, especially in bonds and equities.
In the worst-case scenario, if the country were to stay on the greylist, the costs of being able to transact with the country would impede business and dissuade investment further.
“During a sustained period of greylisting – like junk status, state capture, load shedding, political instability, etc. – we will continue to see a steady erosion of investment flows into South Africa,” said Pottier.
