South Africa faces a capital exodus as foreign investors sold billions of the country’s stocks and bonds in 2023.
This was revealed by the South African Reserve Bank (SARB) in its Quarterly Bulletin in December 2023.
The second quarter of 2023 saw non-South African residents make net purchases of JSE-listed bonds amounting to R22.1 billion.
However, this trend reversed in the third quarter, with net sales totalling R4.9 billion. October and November then witnessed a turnaround as net purchases surged to R23.8 billion.
Therefore, cumulative net bond purchases for the first 11 months of 2023 stood at only R14.9 billion, compared to net sales of R4.6 billion in 2022.
The SARB said several factors contributed to these fluctuations, with concerns about persistent inflation and the potential for central banks to maintain higher interest rates for longer playing a pivotal role.
Consequently, the share of non-resident holdings in domestic government bonds dropped from an all-time high of 42.8% in March 2018 to 25.4% in October 2023.
This trend of capital flight continued in the JSE-listed shares market, with non-residents offloading R43.2 billion in the third quarter of 2023, marking the sixth consecutive quarter of net selling.
This negative sentiment extended into October and November, resulting in cumulative net sales of a staggering R117 billion for the first 11 months of 2023, significantly surpassing the R67.4 billion recorded in the same period in 2022.
The share of non-residents’ holdings in total listed shares witnessed a notable decline, dropping from a high of 40% in March 2023 to 29.8% in November.
The SARB said the prolonged sell-off was driven by concerns over the escalating Middle East conflict, poor domestic and global economic growth, and the impact of load-shedding in South Africa.
Investment inflows and outflows have a significant impact on the South African economy.
A research paper from economists in the SARB’s Economic Research Department revealed the effect of net investment outflows on the South African economy.
In the paper, SARB economists explained a strong link between investment and economic growth, with South Africa being particularly reliant on foreign investment to make up for the country’s poor savings rate.
The Reserve Bank said in its Monetary Policy Review that South Africa experienced significant outflows from foreign investors in the first half of 2023.
The SARB attributed the significant outflows to local structural economic issues and geopolitical tensions of the country’s own making.
South Africa’s largest asset manager, the Public Investment Corporation (PIC), has also flagged its concern about foreigners dumping local assets.
The PIC said geopolitical tensions have made investors risk-averse, leading them to sell emerging market assets, such as South African stocks and bonds.
This has caused capital to flow out of emerging markets and into safer assets, such as US dollar-denominated assets.
Share of non-resident holdings of domestic government bonds
Cumulative non-resident flows in domestic equity and bond markets
Hat tip to Karin Richards for her Twitter posts on the issue.