South Africa is set for “an extremely rocky road ahead, with little chance of taking an off-ramp” due to the country’s harmful foreign policy, which is scaring off local and foreign investors.
This is according to Peter Attard Montalto, managing director at Intellidex, who penned an opinion piece in BusinessDay about the effects of South Africa’s foreign policy.
Montalto said that investors in South Africa are not used to foreign policy being an investment risk and thus have struggled to price in the potential effects.
Investors expect South Africa to reverse its foreign policy course as the economic consequences become apparent, but Montalto thinks a course correction is unlikely.
This is due to the apparent “glee with which the West seems to be given a kicking at every turn” by the South African government.
The anti-Western nature of the country’s government is too deeply embedded. It is second nature for ruling party members, according to Montalto.
Thus, “there is growing anger among many investors that South Africa is seriously out of its depth regarding its path”.
Many investors think that the government cannot comprehend the consequences of its actions and do not view its stance on the Ukraine war as truly non-aligned.
“The economic shocks never come on day one”. Rather, there will be a slow repricing of South African assets over time.
According to Montalto, we can see the impacts already with declining demand for South African bonds.
Towards the end of 2023, Montalto expects foreign banks and investment firms to adjust their long-term assessments of South Africa’s risk profile.
This will result in a “broader tightening of the screws by investors based on South Africa’s foreign policy stance”.
Foreign investors will apply a more sceptical lens on South African assets – “there will be no announcements and no real way to track it”, investors will just slowly invest their money elsewhere.
Worryingly, this will occur regardless of whether the United States imposes sanctions upon South Africa. It is already too late to reverse these behind-the-scenes changes, Montalto said.
Montalto has previously said that this issue has “no end in sight”, with recent threats of sanctions and a public diplomatic spat merely being symptoms of a longer-term deterioration in South African relations with the West.
Putin’s visit to South Africa for the BRICS summit in August “could be something of a tipping point” for the South African economy and the rand, Montalto said.
However, the likelihood of sanctions is very low. What is more likely and damaging is the erosion of economic and diplomatic relations with the West.
This will further weaken the rand and deteriorate South Africa’s economic performance.