South Africa is on a very worrying path with its deteriorating economic performance and rising debt levels, but it is moving in a better direction over the medium term.
This is according to Tilmann Kolb, an emerging markets analyst at UBS Global Wealth Management, who spoke to CNBC Africa about investing in South Africa.
UBS is one of the largest asset managers globally, with over $3.1 trillion in assets under management.
Kolb recommended that investors be cautious when investing in South Africa, even with some positive developments over the medium term.
By extrapolating the country’s economic performance in terms of growth, debt, and budget balances, it is clear that South Africa is “on a very worrying path”.
According to Kolb, there is still time to rectify many of the country’s issues, but it is running out.
National Treasury’s expectations in the budget for growth, public debt, and its fiscal deficits are overly optimistic, said Kolb. History indicates that, in reality, the performance will be worse.
Strong interventions are needed for South Africa to grow and reduce its debt. Current actions by the government are “neither hindering nor giving confidence” to investors.
Moving debt from State-Owned Enterprises (SOEs) to the government’s balance sheet will not solve operational issues and systemic underperformance.
What is required is a significant overhaul of how SOEs operate and increased privatisation of critical services such as electricity and logistics.
Opportunities for investors in South Africa
Kolb pointed out some opportunities for investors in South Africa, focusing on commodities and the local currency.
UBS anticipates that China’s rebound after reopening will be strong and will thus drive commodity prices higher.
In turn, this should increase the value of commodity exports from South Africa, boosting the country’s tax revenue and supporting its beneficial balance of payments. This will strengthen the rand in the short term.
However, commodity prices are volatile and cannot be relied upon for long-term economic growth.
Thus, Kolb said, “For buy and hold investors, we would emphasise caution” – the benefits will be found in short-term trades.
He urged the government to have a “continued, persistent focus on keeping its fiscal balances under control” and to run a fiscal surplus in the short term, preferably.
This will reduce the government’s debt load, enabling it to invest more freely in the country while reducing investors’ fears of debt levels becoming unsustainable.
“The question is about execution, not about planning”, with government policy being broadly correct but implemented ineffectively or not at all.
The government must facilitate private sector investment in the economy, particularly in electricity generation and logistics.