News in South Africa 10th January:

1. SA’s R990 billion problem:

It’s been nearly a decade of waning foreign interest in South African stocks, with outflows nearing R1 trillion over the period.

SA’s R990 billion problem
Photo by Yan Krukau

Last year was the eighth year in a row that foreign investors dumped South African equities — a record-long streak — selling stocks worth $8.3 billion (R155 billion).

That took the total since 2016 to $53 billion (R990 billion), based on data reported by exchange operator JSE.

The past decade has been a poor one for emerging markets as a whole, with MSCI’s benchmark index notching a gain of just over 3%.

Yet the benchmark index in Johannesburg has done worse, losing almost 6% in dollar terms.

Meanwhile, the rand has fallen 42% this time, a contrast with other developing nations where currencies have generally outperformed stock markets.

Foreign investors have been wary of South Africa following a slew of corruption scandals, an energy crisis linked to the debt-ridden Eskom and a meltdown at Transnet, the state-run rail and ports operator, according to Ashish Chugh, portfolio manager at Loomis.

Unemployment and high public debt are also challenges, especially an upcoming election that’s expected to be the most competitive since South Africa became a democracy in 1994.

“This is an election year for South Africa, and we believe it will be a tight race. Investor sentiment could improve if the winning party introduces strong reforms and policies to address investor concerns,” Chugh said.

2. New ‘mega’ state-owned company:

South Africa’s minister of public enterprises will soon introduce a bill in parliament to establish a government firm that will own and manage at least 13 of the country’s state-owned companies.

The National State Enterprises Bill will establish the State Asset Management SOC Ltd. and provide for the phased transfer of state enterprises to the holding company.

Many of South Africa’s state-owned companies, including power utility Eskom, rail and ports operator Transnet and arms maker Denel have been plagued by mismanagement and corruption.

These firms are currently overseen by the Department of Public Enterprises.

The department has gazetted the explanatory brief for the establishment of the new SOE, including its general goals.

The bill lists the following entities for potential transfer to the new holding company:

  • Air Traffic and Navigation Services Co. Ltd
  • Airports Co. Ltd.
  • Broadband Infraco SOC Ltd.
  • CEF (Pty) Ltd.
  • Denel
  • Eskom
  • Sentech SOC Ltd.
  • South African Airways SOC Ltd.
  • South African Forestry Co. SOC Ltd.
  • South African National Road Agency Ltd.
  • South African Nuclear Energy Corp. Ltd.
  • South African Post Office SOC Ltd.
  • Transnet

According to the gazette, the department aims to “enhance the operational efficiency” os tagte companies through the holding company, which will allow it to achieve the government’s developmental goals.

The new SOE will act as a holding company that exercises control and ownership of all its subsidiaries in terms of the South African Companies Act and applicable legislation.

While the process is moving forward, there is still quite a path to tread.

In terms of the bill, the president will have to develop a “national strategy” working with the presidential advisory committee and in consultation with the new state-owned holding company and the minister(s) in charge.

This strategy will include the manner which the holding company and its subsidiaries must perform, as well as their various objectives, performance targets and developmental obligations.

The strategy must be reviewed every five years.

Notably, while the state will be the sole shareholder of the new holding company, the president is the single representative of the shareholder, centralising even more control over state assets within the presidency.

3. Can SA escape the grey list:

National Treasury is hopeful SA will be removed from the dreaded Financial Action Task Force (FATF) grey list by early 2025, and a recent follow-up report by the international body seems to support that view.

Not so fast, says credit management company Debtsource. CEO Frank Knight says a timeous exit for SA from the grey list could be in jeopardy because SA companies have been slow to register as ‘accountable institutions’ as required under new amendments to the Financial Intelligence Centre (FIC) Act.

These amendments expanded the definition of credit providers and included high-value goods dealers (dealing in goods valued at more than R100 000) and crypto asset service providers as ‘accountable institutions’ that must register and submit regular reports to the FIC.

Also included under this expanded definition are estate agents and casinos, where the risk of criminal and terrorist activity is deemed to be high.

With this expanded definition comes new reporting obligations, such as the need for risk management and compliance programmes.

These reports can be costly and time-consuming, and no doubt explain why companies are slow to register or are ignoring the amendments, hoping sloppy enforcement will render them nullities.

A consistent theme in the FATF findings was not so much that SA lacked adequate anti-money laundering and combatting of terrorism (AML/CFT) measures, but that these were weakly enforced.

Another theme was the need to identify beneficial owners of companies and trusts, flushing the ‘warm bodies’ pulling the financial strings out of the shadows and into the sunlight.

For local companies, greylisting carries the stench of poor financial hygiene, even if by association.

Many private sector companies are well regarded by their overseas counterparts, but the greylisting label applied to SA as a whole increases reputational risk and imposes higher standards of due diligence when dealing with foreign businesses and banks. Krutham (formerly Intellidex) estimated this could cost the economy 1% of GDP a year in an optimistic scenario and 2-3% in a more pessimistic one.

Great improvement, but one major issue

The latest FATF report shows improvements in 18 of the 20 deficiencies previously identified by the international monitoring body. SA is now deemed fully or largely compliant with 35 of the 40 FATF recommendations initially identified in 2021. This leaves five areas of deficiency to be addressed.

One of the steps taken was to form an inter-departmental committee on anti-money laundering and combatting terrorism financing. SA will need to show that efforts to curb money laundering and terrorism financing are sustainable before the greylisting label is removed. That may be easier said than done.

Based on levels of compliance and awareness of the requirement in the trade credit market, very few companies are registering as accountable institutions, “and this will be noted by FATF to our detriment,” says Knight.

The stakes are high for these accountable institutions. The potential repercussions include not only financial penalties but also reputational damage and a tarnished business environment.

“There is a scale of administrative sanctions starting with a caution, and rising to a reprimand, directive to take remedial action, a restriction or suspension of certain specified business activities, and finally a financial penalty of up to R50 million for any legal person,” adds Knight.

According to law firm Cliffe Dekker Hofmeyr, these new accountable institutions will have to register with the FIC, perform risk assessments on their businesses to identify whether any money laundering or terrorist financing risks appear in their businesses, and put together an AML/CTF policy.

4. Good news for interest rates:

South Africa’s inflation is likely to average 4.5% year-on-year in 2024 or lower, which could see the South African Reserve Bank (SARB) cut interest rates as soon as July of this year.

This is the view of Investec chief economist Annabel Bishop, who said that, despite this optimistic projection, inflation in South Africa still faces upside risks.

These risks include food prices, a weaker rand and higher global commodity prices.

“Specifically, we currently forecast that CPI inflation will reach 4.5% year-on-year in July this year, dipping to 3.4% year-on-year in October and moving back towards 4.0% year-on-year in December on base effects, although the upside risks mentioned could derail this outcome,” she said.

Bishop explained that an average of 4.5% for 2024, likely similar for 2025, if not slightly lower, would imply interest rate cuts, with monetary policy increasingly restrictive from mid-Q1 2024 without easing rates.

“However, given the marked weakness in the rand, which has contributed significantly to higher inflation, the SARB’s Monetary Policy Committee (MPC) would likely favourably view rand strength to drive inflation lower,” she said.

Bishop said the rand remains undervalued, at over R3.00/USD removed from its fair value against the US dollar. 

“Such substantial weakness has been instrumental in contributing to higher fuel and food costs in South Africa, amongst other inflationary effects.”

She said that should the US cut interest rates in the first half of 2024. The rand could see some strength as the difference between the US and South African bank rates widens if South Africa does not cut.

March is currently viewed as the first month the US could likely cut rates in 2024.

She said inflationary pressures, globally and domestically, are on a general downward trend, adding to expectations of interest rate cuts. 

“This does not mean inflation consistently falls (at every print), but instead, in general, is tending to decline,” she explained.

Bishop added that fuel prices are key for South Africa’s inflation outcomes, and November’s large R1.78/litre cut in the petrol price helped pull inflation down to 5.5% year-on-year in November, from 5.9% in October.

In addition, December’s -64c/litre cut should aid inflation lower to around 5.2% year-on-year.

“While inflation is likely to temporarily return to around 5.8% year-on-year in January’s outcome for this year, it should drop to near 5.3% in February and 4.7% in March, as an overall downward trend is maintained, allowing for interest rate cuts this year,” she said.

The petrol price fell at the start of January by 76c/litre and diesel by R1.18/litre, with further modest fuel cuts building for February, which will detract from inflationary pressures in those months, she added.

5. Big hopes for the car industry:

New vehicle sales in South Africa managed to show some growth in 2023, with expectations positive for 2024.

Brandon Cohen, Chairperson of the National Automobile Dealers’ Association (NADA), said that growth in the new vehicle market seemed unlikely given the declining performance of the industry in the second half of 2023.

According to data from Naamsa, December marked the fifth consecutive month of year-on-year decline, with aggregate industry new vehicle sales dropping by 40,329 units – a decline of 1,392 vehicles (-3.3%) compared to the 41,721 units during December 2022.

The new passenger car (-3.9%) and light commercial vehicle (-2.9%) markets reflected a weak market performance. The sales of medium commercial vehicles also dropped year-on-year by 24.2%.

However, looking more positively, the sales of heavy commercial vehicles and buses increased by 13.9%, while export sales jumped by 1.2%.

Looking at the whole of 2023, new vehicle sales increased by 0.5% from 529,556 in 2022 to 532,098 units sold in 2023.

Although it was an improvement, it was not at the scale of the hoped-for pre-pandemic levels, with Naamsa noting that it will likely take four years to recover to the pre-pandemic level of 536,612 units in 2019.

Despite the strong start to the year amidst a depressed economy, the elevated cost of living increases and power outages, Naamsa said that the major logistical challenges at the country’s ports proved too much for the new vehicle market to make a full recovery.

“Overall, last year, dealers had to cope with tough market conditions that were, arguably, the toughest since 2007 or even 1998 in terms of economic pressure on consumers,” Cohen said.

“This led to some overstocking, placing importers, distributors, and manufacturers under significant pressure to facilitate stock movement. Consequently, efforts were made to enhance market activity through year-end incentives, ensuring sustained sales momentum.”

Looking more positively, exports hit a new record of 396,290 units – a 12.7% improvement from 2022. This is good news for local manufacturers as two out of every three vehicles manufactured in South Africa are exported, which should help ensure higher employment levels in the sector.

Looking ahead to this year, Naamsa said that the pause in interest rates in the second half of 2023 and the easing of inflation should give some respite on household finances.

Lower interest rates, faster economic growth and moderate inflation could also support the new vehicle market this year.

All information sourced from articles posted by: DailyInvestor, Moneyweb, and BusinessTech.

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