Markets are casting judgement on South Africa and resetting their baseline expectations for the country – and the verdict is not good.
The rand has taken a nosedive in recent weeks, buckling to its weakest point on record over R19.80 to the dollar last week. While the currency has firmed somewhat in recent sessions, it has by no means staged a massive recovery and remains squarely on the back foot.
The cause of the crash are manifold: South Africa’s ongoing power crisis is the elephant in the room, crushing businesses, households and general confidence. In the same vein, the government has been slow to address the crisis, and many of its plans are only on paper.
Then there’s the political missteps – from controversial policy issues like universal healthcare in an economy that can’t afford it, to pro-Russia stances and utterances at a time the country is a pariah to South Africa’s biggest trade partners.
Putting the cherry on the top of the rand’s issues last week, markets were hit with commentary from the Reserve Bank that painted a bleak picture of the months ahead. While the central bank clarified that its views are risk-based (and not baseline expectations), the damage was done.
According to Intellidex co-founder and financial analyst Stuart Theobald, markets are not typically interested in the politics of the day and short-term volatility but are rather singularly focused on one thing: profits.
Specifically, how profitable companies are and how likely borrowers – of which the South African government is one of the biggest – are to repay their debts.
In this context, markets and indicators like the rand are big tells of how a country is performing. They fluctuate and react, sometimes sharply, to prevailing conditions, but generally form a baseline or trend that shows how things are faring.
Theobald noted that markets have taken a harsh stance on South Africa in recent months – which may indicate a more permanent shifting of expectations as the reality of South Africa’s economy finally catches up with it.
“The last two weeks have seen intense belief updating. Bond markets have weakened significantly, with long bond yields spiking to their highest levels in recent memory – bar a brief spike at the start of Covid-19,” he said.
“In the past three weeks, the rand lost about 8%. The JSE’s all share index struggled to benefit as it usually does from the weak currency, given that much of it reflects dollar revenues and some degree of rand costs.
“This really is a harsh judgment that the prospects for our economy are dark indeed,” he said.
Markets have reacted harshly towards Soith Africa in the past. In 2015, when former president Jacob Zuma fired former finance minister Nhlanhla Nene in a midnight address, markets – caught completely by surprise by the huge change in the country’s Treasury – went into a spin, and the rand tanked.
However, Theobald said that, unlike that situation, there is no single cause behind the rand’s collapse this time around.
“The market turning point coincided with the debacle of American concern about a sanctioned Russian ship collecting arms in Simon’s Town, and were further spooked by hawkish comments when the Reserve Bank raised interest rates last week.
“These have marked an inflection point, with investors fundamentally shifting their outlook for the economy downwards,” the analyst said.
“It is a painful settling in of reality. Asset prices are now adjusting to what economists have long been saying: that South Africa’s growth outlook is a mess.”
Theobald said the consequences of this shift would be far-reaching and would filter through the economy for months and years to come.
“Companies’ profitability is falling as one after the next they reveal load-shedding and input costs are decimating their bottom lines. If companies are less profitable, they are less likely to invest. They won’t expand and, therefore, won’t hire more people. Lower profits also mean less tax,” he said.
“Over at the bond market, the bleak outlook for economic growth means the government will struggle to meet revenue targets and struggle to keep debt under control. All these factors are making South African assets unattractive.”