South Africa’s rise and fall

South African equities have had a wild ride since 1994, experiencing billions in inflows and outflows within two decades. 

While the shift from inflows to outflows may occur month-to-month, there are clear trends in the attractiveness of local equities to foreign investors. 

Stanlib chief economist Kevin Lings outlined these trends in his second-quarter economic update for South Africa. 

Lings divided South Africa’s economic story since 1994 into three phases. The first phase was from 1994 to 2011, the second from 2011 to 2016, and the third from 2016 to the present day. 

Over these three phases, local equities have experienced a significant shift in interest from foreign investors. 

Before South Africa’s first democratic election in 1994, its economy stagnated, with economic growth averaging 0.2% between 1990 and the election. 

The country was also facing increasingly strict international trade embargoes and boycotts, crippling its ability to import oil and other vital commodities. 

As a result, South Africa was battling rising debt and a weakening currency. In other words, the country was heading for bankruptcy and needed urgent economic and political reforms. 

The Mandela administration, followed by Thabo Mbeki, turned the country’s economic fortunes around by creating a framework to cut government spending and grow the economy. 

Under these two administrations, South Africa’s economic growth increased significantly, averaging over 3% annually. 

The local currency stabilised, and the government even managed to run budget surpluses consistently, cutting government debt and improving the country’s credit rating. 

Under the two administrations, South Africans experienced a rise in living standards, with growing access to basic services and the creation of a significant social welfare system. 

As a result, foreign investors pump billions into South African equities, further strengthening the currency and giving local companies funds to invest in growth. 

This can be seen in the graph below, courtesy of Lings. 

Phase two saw the beginning of a prolonged period of difficulty for South Africa’s economy and waning interest in its assets. 

This was partly due to the Great Financial Crisis towards the end of the 2000s, which saw investors’ risk appetites decline sharply. 

However, it was mainly due to the beginning of financial mismanagement and the onset of state capture within South Africa. 

This saw key institutions and government departments hollowed out or overrun with pliable leaders who sought to enrich themselves at the expense of service delivery. 

Government spending also skyrocketed as Pravin Gordhan replaced Trevor Manuel as Finance Minister, while economic growth declined. 

The last time the country posted a budget surplus was the 2007/2008 financial year, after which the government has run 16 years of budget deficits. 

This resulted in South Africa’s government racking up a massive debt pile, which it is still struggling to service. 

Foreign investors did not immediately abandon the country, choosing to wait and see without committing further capital to local assets. 

And so, phase two was characterised by a relative lack of interest in South African assets by foreign investors – but not outright dumping of equities. 

This marked the beginning of South Africa’s economic decline, with reduced interest from foreign investors limiting the pool of capital able to be invested in new projects across the country. 

The graph below shows this phase, following on from a period of strong growth in foreign investment in South Africa, correlating with the stagnation of the local economy. 

Phase three has been the most disastrous for South African equities as foreign investors have abandoned them as the country’s economy continued its decline. 

The trends that began under President Zuma have broadly continued under Ramaphosa’s administration, with the implementation of reform being slow and the country’s turnaround gradual. 

In 2008/09, gross loan debt amounted to R627 billion or 26% of GDP, with net loan debt at R526 billion or 21.8% of GDP. 

By February 2024’s Budget Speech, the government’s gross loan debt had reached R5.21 trillion, or 73.9% of GDP.

As a result, the government’s debt-servicing costs have skyrocketed and are beginning to crowd out spending in other areas of the economy. 

The government spends over R1 billion a day to service its debt, and the number is only set to grow in the coming years. 

The main issue is not necessarily an increase in the government’s debt levels. It is the country’s poor economic growth, which means it is unable to take on additional spending even in times of crisis. 

Some economists have argued that the country’s economic growth crisis has manifested itself as a financial crisis, with the only long-term solution to increase the size of the local economy. 

As a result, foreign investors have lost interest in South African equities, dumping them en masse since 2016 as shown in the graph below.