investment viewpoints

South Africa: New leadership brings hope of reform

South Africa: New leadership brings hope of reform

Carlos De Leon

Portfolio Manager

South Africa’s newly-elected President Ramaphosa has promised to revive a sluggish economy. How likely is he to succeed?

On 8 May, the African National Congress (ANC) secured a majority after obtaining 57.5% of votes at the general election. The new administration could provide an inflection point for South Africa  a vote of confidence in the political leadership  and has strengthened President Ramaphosa’s hand as party leader, giving him a firmer political mandate to stamp more of his authority on policy direction.

The election results represent a fresh opportunity to put the country on a new growth path via decisive reforms and more ethical leadership. An investment conference scheduled for later this year could provide an update on Ramaphosa’s 5-yr investment initiative where the government aims to attract upto $100m in new investment.


Growth of the horizon

South Africa’s economy has been stuck in a slow-growth trajectory over the past 5 years, with sub-2% growth below potential. A shift into higher gear would need to be accompanied by decisive measures to make the economy more attractive to investors. Business confidence and economic activity could benefit markedly from a combination of pro-growth initiatives, enhanced policy clarity (especially land reform), reforms at state-owned enterprises, improvements to power supply and enhanced labour relations.

Progress will likely evolve gradually with a limited bearing on key macro variables in the near-term, but there is clear upside risk if decisive action is taken swiftly (especially for companies exposed to domestic consumption). Expectations are low, and a new pace of reform momentum could lift GDP growth beyond the pedestrian growth rate projected at 1.2% for this year and 1.8% for 2020. A key signal on reform progress may emerge when domestic companies start re-allocating more investment to the local economy, following years of spending in foreign markets.


Fresh opportunities for investors

Expectations for structural reform implementation do not appear to be built into current equity market valuations, thus offering interesting optionality and substantial re-rating potential to this under-owned market once growth does come through. This is particularly the case for the consumer sector, which has had to face broad-based macro and competitive headwinds in recent years.

Macro recovery combined with a healthier consumer could positively translate into increased operating leverage and higher margins. The financial sector should also benefit, aided by self-help cost initiatives, including increased focus on the digital channel and branch network reductions. The action plan of debt-laden public utility Eskom (a South African electricity public utility company) and Moody’s sovereign rating review in H2 should also provide visibility on prospects.

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