Emerging market countries are not immune to crises: be they capital flight or currency or banking crises, says Lesiba Mothata, Chief Economist, Investment Solutions.
“South Africa is no different to any other emerging market country, which, at some stage of development, found that investor sentiment changed towards it with dire economic consequences. History teaches us that self-inflicted crises have a lasting effect and could prove much more damaging than episodes of contagion and negative impacts flowing in from elsewhere in the world.
“While South Africa has enjoyed a global tailwind due to the growing demand for emerging assets (bonds and equities), improved Chinese growth outcomes, a strong demand for its exports to sub-Saharan African countries and capital inflows received by SAB Miller shareholders, the country is not immune to a sudden shift in investor sentiment.”
At this stage of the country’s economic recovery – and taking into account an ongoing lust for yield by global investors – South Africa should be able to see an improved economic outcome, comfortably achieving gross domestic product (GDP) growth of more than 1% in the next year, Mothata adds.
However, he says the ongoing machinations surrounding the leadership of the National Treasury induces huge uncertainty regarding the path fiscal policy will take from here.
“It appears the upcoming Medium-Term Budget Policy Statement – due later in October – may contain surprises that could spook investors and rating agencies. While no one person is above the law – and they should be tried in court if found wanting – the way in which the grandstanding between the Minister of Finance and the National Prosecuting Authority is playing out is eroding confidence.”
Mothata believes it’s unfortunate that when South Africa can easily delay a ratings downgrade, it seems poised to deliver its fate to a sub-investment grade (so-called junk status) decision.
“Emerging market countries get disproportionally punished for fiscal mismanagement. After many years of prudent fiscal management, it looks like a tipping point has been reached,” he concludes.
