News in South Africa 12th October:

1. Foreigners flee SA stocks:

Foreign investors have accelerated their (net) selling of equities on the JSE, with sales 40% greater thus far in 2023 than in the same period in 2022. To last Friday, non-SA investors sold a net R103 billion of equities, versus R73 billion in the first 40 weeks of last year. Year to date, the JSE All Share Index is down 1.1%. (The flows picture for bonds, while still barely positive for the year, is down 70% versus 2022).

Foreigners flee SA stocks
Photo by Anna Tarazevich

Foreign selling has been a firm theme of the past four years, with the last burst of net buying being a ‘Ramaphoria’ induced pop in 2018, following Cyril Ramaphosa being appointed president. The decline began in the final years of the Jacob Zuma administration. This is according to a chart from Ninety One, understood to be part of a presentation to clients and published on X (neé Twitter) by investor and well-known commentator Karin Richards.

Cumulatively, outflows are almost certainly more than $40 billion by this stage (the chart has data to May 2023). 

Source: Investec Securities and Bloomberg

The steadily weakening rand impacts the returns of foreigners, and with domestic earnings growth moribund – or non-existent – there’s not an awful lot to be excited about. In dollar terms, the performance of our market is among the worst in the world. According to data from PSG Wealth Old Oak, the South African country ETF (exchange-traded fund) is the third worst globally when measured to Friday, 6 October. The ETF is down 11.3% this year; the two worst performers, Thailand and Hong Kong, are at -17% and -16%, respectively.

It does not help that investors are pulling their money from emerging markets. A Bloomberg report this week noted that “outflows from US-listed ETFs that invest across developing nations as well as those that target specific countries totalled $3.12 billion last week”. This was the largest weekly outflow this year, where net inflows only total $6.86 billion.

If this trend continues till the end of the year, flows will be negative for 2023. 

These flows are important as mega-funds – such as the iShares MSCI Emerging Markets ETF, with close to R500 billion in assets – are forced to trim their holdings across the board if investors withdraw their capital. In August, there was sustained and substantial selling of three JSE shares, MultiChoice Group, Mr Price Group and TFG Limited, due to a rebalancing of the MSCI Emerging Markets Index. These three stocks were removed from the index due to South Africa’s weighting in it being reduced. One estimate put the outflow due to this selling at around R7 billion ($360 million). 

Writing in the June quarterly review for the Ninety One Value Fund, which he manages, portfolio manager John Biccard says: “The perfect storm of several factors has resulted in an unprecedented selling of SA equities by both local and offshore investors. These include political upheavals, load shedding, weakening commodity prices and the loosening of regulations around maximum offshore exposure for South African portfolios. 

“As a result, foreign investors have sold local equities for 48 of the last 54 months and now are positioned at half the benchmark weight in South Africa within the emerging market index. Local investors are fast approaching the 45% maximum allowed in offshore holdings. The result is a plethora of 7X PE and 7% dividend-yielding stocks, as the herd continues to sell quality SA stocks on 7% yields in order to convert their one rand into 5 US cents, and then buy US tech stocks on 0.5% dividend yields.”

2. Concerns over medium-term budget:

South Africa’s fiscal metrics will likely show some deterioration when Finance Minister Enoch Godongwana announces the Medium-Term Budget Policy Statement (MTBPS) on 1 November.

Investec Chief Economist Annabel Bishop said that Godongwana has already warned that the country needs to cut back on expenditure as revenue collections have faltered amid low economic growth and a poor export year.

Failures at Eskom and Transnet have particularly hurt the nation’s economic performance, with the MTBPS expected to give an update on the debt of both SOEs.

“Inflation will come out closer to 6.0% y/y for this year versus the 5.3% y/y forecast in February, which would boost nominal GDP somewhat, but both the fiscal debt and deficit outcomes are likely to be higher for the current fiscal year than projected on overspending and revenue underruns,” Bishop said.

“The budget deficit for 2023/24 was projected at -4.0% of GDP, but we now expect -4.5%, with 2024/25 estimated at -3.8% and 2025/26 at -3.2% (likely -4.0% and -3.4% instead, respectively).”

Although the gross loan debt for the current fiscal year (2023/24) was expected to reach 72.2% of GDP in the February Budget review for 2023, far higher government spending – following a 7.5% public sector wage increase for 2023/24 – places pressure on debt ratios in an environment of declining revenues.

For instance, Stats SA noted that company tax collection has disappointed this last financial year, as the local mining industry – a major bright spark last year – more than halved its contributions in Q2 2023.

The fiscal debt and deficit ratios will thus depend on the government and businesses’ success in turning around the state’s logistics and power utilities.

Climate change costs will also feature at the MTBPS, even if South Africa mainly focuses on bringing on renewable energy projects. With the government stating that it plans to add or recover 12,000 MW by the end of next year, load shedding should start to ease.

“However, faster economic growth adds to demand-side pressure, and next year GDP growth is expected to rise to 1.2% y/y,” Bishop said.

Although Moody’s said in February that it did not expect a significant widening of the fiscal deficit due to predicted abundant spending cuts, Bishop noted that the government has not cut spending, which could worsen the fiscal ratio.

“South Africa will need to see a curb on expenditure and higher revenues for the rest of the 2023/24 fiscal year to achieve its fiscal estimates, and markets are wary that in a low growth environment with high, and rising, bond yields this becomes more difficult,” Bishop said.

“The MTBPS will be scrutinised for cost-saving measures that will allow the fiscal projections to be met. SA’s borrowings are already unsustainable, at well above the EM (emerging market) limit of 60% of GDP, and previously set to rise higher, undermining the rand, and adding to higher borrowing costs.”

3. SA debt crisis:

South Africa must repay R90 billion in foreign debt within the next three years as the country faces a significant fiscal deficit and mounting debt servicing costs.

This is according to the South African Reserve Bank’s (SARB) September 2023 Quarterly Bulletin.

The government owes a total of R427 billion in marketable debt to foreign creditors as of 30 June 2023.

Of this total, R28.4 billion will be due for repayment within one year, R61.6 billion will be due for repayment within one to three years, and R337 billion will be due for repayment in more than three years.

Therefore, South Africa will need to repay R90 billion to foreign creditors within the next three years.

According to the SARB, on average, the government will take 156 months – 13 years – to repay its foreign debt.

Rising debt and costs:

The fiscal deficit is only set to worsen as South Africa’s debt servicing costs keep mounting. 

Efficient Group chief economist Dawie Roodt recently warned that South Africa’s deficit and debt levels are approaching dangerous territory.

South Africa’s current debt-to-gross domestic product (GDP) ratio is 73%. In nominal terms, the country owes around R5 trillion.

At the current trajectory, Roodt expects the debt-to-GDP ratio to reach 76% in the current financial year and increase to 80% the year after that.

“A debt-to-GDP ratio of 80% for South Africa is getting into dangerous territory,” Roodt warned.

Earlier this year, economists started sounding the alarm over South Africa’s increasing debt burden and particularly its debt-servicing costs, which threaten to drag the country into a debt spiral.

Debt servicing costs are the payments that a government makes to its creditors, including interest payments and repayments of principal.

South Africa’s debt servicing costs have increased to roughly R1 billion a day, which Sean Segar of Nedgroup Investments calculates at $1 per day per South African citizen.

This line of expenditure has increased disproportionately to other expenditures, and the addition of R254 billion of Eskom’s debt will amount to 19.8% of total government spending in the next three years.

According to the SARB’s bulletin, the debt-service cost schedule of the national government’s foreign debt reflects the interest payments by currency of debt denomination due in the next 12 months, as from 30 June 2023.

Interest payments in US dollars dominate the schedule, as expected from the currency of denomination analysis, followed by interest payments in rand on the Covid-19-related debt denominated in rand.

4. Looming fuel crisis:

South Africa is faced with a “looming crisis” as demand for fuel is expected to keep rising and its refining capacity remains severely constrained. 

Just three of the country’s six refineries are operational. 

Speaking at African Oil Week on Tuesday, Central Energy Fund (CEF) group chairperson Ayanda Noah said in addition to just half of SA’s refineries now being operational, 35% of refinery design capacity is available. 

‘Very concerning, very expensive’

“The refineries paint a very concerning picture, there is a looming crisis on the fuel side and we are importing quite a lot, which is very expensive for the country,” said Noah. 

Dwindling refinery capacity and forced closures since 2020 have led to decreased domestic production and record imports as the demand for fuel is expected to rise.

According to Noah, it is anticipated that 53% of refined fuel products will be imported into South Africa by 2025, amounting to 604 000 barrels per day.

5. Transnet privitisation:

The South African presidency has a plan to reverse the collapse of a state-run ports and freight-rail sector that’s cost the economy at least R500 billion since 2010: hand over most of the responsibility for fixing it to the private sector.

The plan is encapsulated in a 124-page Roadmap for the Freight Logistics System in South Africa.


All information sourced from articles posted by: Moneyweb, BusinessTech, DailyInvestor, Fin24, and News24.

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