Investors reward reform as SA’s outlook improves

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JEREMY MAGGS: The following interview is brought to you by the RMB Think Summit. Business leaders are navigating a world of heightened geopolitical tensions, shifting trade relationships, tighter capital and growing uncertainty about where to invest for growth.

For South Africa, I think the question is whether the country can turn its myriad challenges into real opportunities, and then persuade investors that it remains a credible destination for long-term capital.

The RMB Think Summit brings together local and international leaders to explore how businesses and economies can respond to volatility with confidence and fresh thinking. Ahead of the event, I’m in conversation now with Isaah Mhlanga, who’s an economist at RMB.

Isaah, what then is, in your opinion, the biggest source of uncertainty right now that is confronting business leaders and investors? I know it’s a long list, but what’s the big concern, in your opinion?

ISAAH MHLANGA: Thanks, Jeremy. At this point in time, we have a Middle East shock that has driven oil prices higher, inflation starting to rise across the globe, but also in South Africa, which means it’s going to be a tax on economic growth, both from an impact on the consumer, but also the response of central banks, particularly our own South African Reserve Bank (Sarb), that we expect is going to start acting and hike interest rates, putting more pressure on the economy.

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That is the external shock. But we also have our own issues. The political cycle is also putting uncertainty on economic policy and the reforms that we have been undergoing over the last three to four years. Are they going to continue? That’s the big question.

JEREMY MAGGS: It’s a very uncertain environment. And in this world that you outline of higher risk and more cautious capital, what then, in your opinion, still makes South Africa investable.

ISAAH MHLANGA: It’s what we have been doing over the last three to four years, opening up critical sectors of the economy from energy to logistics, water sector is coming, digital space to the private sector, where government is essentially saying they need the private sector to be part and parcel partners that are going to invest in these critical sectors to introduce competition, but also a level of governance that is going to make the space [an even playing] field for investors, both domestic and external.

The more interesting part is the investment cycle has been led by domestic investors, which means offshore investors will have more confidence seeing domestic investors invest.

But also, the political cycle with the formation of the GNU (government of national unity) in the last general election. It has remained intact. A few sets of economic policies which are supported across the board of all political parties that are in the in the GNU. Which is why the local government elections, coming up on 4 November, is very important.

We will have a panel that will be discussing the potential outcome or what the local government is going to bring about from a policy perspective and what it means for investment going forward, which is going to be to be available to the public.

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JEREMY MAGGS: I want to reflect on the conference in a little more detail in a moment. But just against the backdrop that you’ve outlined, South Africa, I think, is fair to say, still battles weak growth and high unemployment. Is there anything that is going to convince investors that a genuine turnaround is underway, or do you think that those noises are already being heard?

ISAAH MHLANGA: No, the noises are already being heard. Last year we had S&P (Standard & Poor’s) upgrade South Africa’s credit rating, it’s nearly two decades [since] the last time we’ve seen a credit rating upgrade, and it still left the outlook on positive, which means the next action is likely to be an upgrade again.

A week ago, we had Moody’s also change the outlook to positive, which means the next action is also going to be an upgrade. Now we have two credit rating agencies that have affirmed what we have been saying. Economic reforms have been implemented.

It’s no longer whether we are going to see implementation. It has changed to how are we going to sustain the reforms that we are seeing, which means implementation is already happening.

An external validation from credit rating agencies actually is very important for investors. Bond markets have already responded, the cost of funding for the state, but also for the general economy as a whole, given that markets do reference government bond yields, they’ve also declined over the last 18 months or so.

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That is investors voting with their own money, saying we no longer require as much return to compensate for the risks, and therefore they have reduced that required return, which means they are seeing the changes that are taking place from a reform perspective. We just need to sustain this over the next couple of years.

JEREMY MAGGS: Isaah, then to the RMB Think Summit, it’s built around turning volatility into opportunity, what does RMB hope then that leaders will take away from the number of conversations that will be held?

ISAAH MHLANGA: First is to recognise the external shocks, the change in the global macro environment, geopolitical environment and how it impacts on Africa, how it impacts on South Africa and the economic growth potential.

Secondly, is to recognise the opportunities that lie in that global reset. So here is where opportunities lie in South Africa and in the continent.

Then third, it is how to actually take those opportunities in a practical way, going forward.

Then the last one is a call to action, really to say until domestic investors, policymakers act and act decisively, we shouldn’t expect foreign investors to be part of what we want to see, which is a recovery in our own economic growth.

So we have to see action starting here at home before we expect it from offshore investors. And we are seeing that action taking place. It’s slow, but it is happening.

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JEREMY MAGGS: So what would you then look ahead over the next year or two that would give you confidence post the conference that South Africa is starting to attract the capital it needs for jobs and growth?

ISAAH MHLANGA: What we are looking for post the summit is a political cycle that puts economic growth at the centre of how they campaign, how they debate. That’s the first one.

Secondly, a commitment to continuation of the economic reforms that are ongoing currently. Speed them up and openness to talking to the private sector as partners in these economic growth ambitions.

Then thirdly, it is one voice between government and the private sector to say economic growth, investment is what we’re trying to drive. [Draw a line in] the sand to say we need 3% economic growth at a minimum, that is communicated across government, across the private sector, because any economic growth that is less than that is not going to reduce the unemployment rate to the levels that we want to see.

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JEREMY MAGGS: Isaah Mhlanga is chief economist and head of research at Rand Merchant Bank. The RMB Think Summit is the company’s flagship thought leadership platform, convening global and African perspectives to examine the forces reshaping capital markets, trade architecture and long-term growth. It takes place in Cape Town next week.

Brought to you by RMB.

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