South Africa’s economy is about losing hold of its ground in the world economy as SA foreign investors continue to pull billions out of the country, thanks to government policies
A Financial research group, Powerstocks, has released a set of graphs showing a mass movement of SA foreign investors out of the Johannesburg stock exchange (JSE).
According to a report, SA foreign investors pulled R12.8-billion out of the country in just one week this year. The investors pulled out foreign capital invested in JSE-listed equities and South African government bonds between January 18 and 22 this year.
Since the September 2013 foreign-flows peak – achieved two months before SA fell into a business cycle recession – foreigners have dumped an unprecedented net R286 billion in SA equities and government bonds, says Dwaine van Vuuren, CEO of Powerstocks
The massive capital outflows comprise R6.8-billion invested in equity and R6-billion in bonds. A further outflow of R16-billion in equities and bonds occurred in November and December last year.
This was revealed in a weekly report prepared by the JSE, and is the largest of its kind since the 2008 global economic crisis and the fourth highest in South African history.
“JSE shares accounted for 74% of the outflows which brings the total rolling annual (12-month) outflows to R163 billion,” said van Vuuren who also specified that while emerging markets experienced outflows within the last few years, these have been isolated to China.
In fact, he said emerging markets as a group have experienced inflows for every quarter since the end of the financial crises in 2009.
Similarly, a report released on Monday this week by Barclays Emerging Market Research highlighted a massive sell-off of bonds and equity.
In the report, economists Mike Keenan and Ndzutha Mngqibisa, says the capital outflows and South Africa’s large external funding requirements help to explain why the rand has already weakened by 6% this month.
“Last week’s renewed foreign selling was consistent with broad emerging market trends, given that local currency emerging market bonds also sold off aggressively after some respite around the turn of the year,” the Barclays report says.
The blame for this mass exodus has been passed to state government who, according to economists, has failed to run a smaller current account with stringent fiscal policy.
Sanlam Investment Management’s economist Arthur Kamp said he believes that SA recovery will depend on the policy response of the government and the South African Reserve Bank which has to raise interest rates, and the market would want to see a credible fiscal stance in next month’s national budget.
“A repeat of last year’s mini-budget will not be good enough. We need to be more stringent than that,” says Kamp.
Van Vuuren further explained that the majority of the money lost by South Africa could have been prevented as they were primarily caused by factors well within the country’s control.
To buttress his claims, the CEO cited eight reasons why international outflows had increased so drastically, based on factors cited by international ratings agencies. They include:
- SA’s working age population is growing faster than its economy, and unemployment is at 13-year highs and growing.
- The SA economy is going nowhere, and its growth rate is far below its African and EM averages.
- Government finances are perilous – its debt is at record levels and growing, State-owned enterprises (SOE’s) are bleeding us dry and corruption/wasteful expenditure is widespread and unchecked.
- Lack of clear policies across various sectors has led to a plunge in confidence and a widespread private sector investment strike.
- Government, business and labour are focusing on narrow self-interests instead of working together in unison for the best of the country as a whole.
- Most interventions by the government in the economy are focused on regulation and red tape, as opposed to growth enhancement and confidence building.
- Protracted political tensions generate policy uncertainty and impede structural reforms.
- The economy has failed to benefit from the collapsing rand (the rand is no longer a traditional shock-absorber).
Meanwhile, Nedbank’s chief economist, Dennis Dykes, reportedly said the selling off of SA bonds and equities ought to be seen in the context of a world where there is “very little at all for SA foreign investors”, particularly in emerging markets.
M&G reported him saying the thought of South Africa rushing off to the International Monetary Fund to get money is unlikely, but not inconceivable.
A crisis of that nature would have to be triggered by an adverse policy decision by the government. What is more likely is the price of the rand and South African equities and bonds would eventually stabilize, SA foreign investors would see value in them again and the outflow would start to reverse, he said.
He equally added that South Africa has been feeling the economic pain for 12 months, although it can probably be traced back to as far as 2012.
“We have had very little respite,” says Dykes.