Over the past two weeks, several large foreign investors have announced plans to abandon or cut back their investments in the South African economy. Oil major, Shell, plans to exit its investment in its South African downstream assets, including its 700 fuel station forecourts, while BNP Paribas plans to exit its South African corporate banking business.
These developments followed hard on the heels of the Australian giant, BHP, making an offer to buy Anglo American’s business, bar the South African assets, for $39 billion. With election campaigning in full swing, these major divestments have become a political hot potato.
Opposition parties such as the Democratic Alliance (DA) argue that the divestments are a vote of no confidence in South Africa. The African National Congress (ANC) and government counter that the developments are due to shifts in the global economy and corporate strategies rather than a lack of faith in its policies or how it runs the country.
Indeed, government points to Amazon’s launch into the South African market this week as well as the takeover of Consol Glass by foreign investor Ardagh in 2022 for $1 billion, plans by Stellantis to invest R3 billion in the automotive industry, and PepsiCo’s expanded production, as signs of investor confidence.
In this case, the ANC, despite its failings, is not entirely wrong. With the world moving to a lower carbon future, oil and mining majors are rebalancing their portfolios to focus on higher-value businesses and sustainability. In Shell’s case, it has not only divested from downstream assets in Africa but also Australia, Denmark, and parts of South America.
BNP Paribas, for its part, is consolidating its business in Europe and Asia rather than focusing on its small African operations. Given the dominance of the Big Five in South African banking, its prospects for growth in this market would be relatively limited without making a big acquisition.
The proposed BHP/Anglo American deal is perhaps the most politically contentious, given South Africa’s history as a mining country and the perception that mining is uninvestible due to issues with mining licences, BEE requirements, and challenges at Eskom and Transnet. But in this instance, it seems that BHP’s reluctance to buy the South African assets is about its global strategy. The group is focusing on strengthening its copper portfolio, with that commodity vital to the transition to a greener economy.
According to the JSE, 2023 was the eighth year in a row that foreign investors shed South African equities, selling stocks worth $8.3 billion. That took the total since 2016 to $53 billion, based on data reported by the stock exchange.
While none of these developments can be regarded as positive for South Africa, the timing coinciding with a pending election suggests that there are bigger forces at play than local policy and economic factors. On the face of it, there is not a lot of good news. But closer examination suggests South Africa has not performed as poorly as an investment destination as some observers suggest.
Data from RMB indicates that South Africa is in the middle of the pack among countries that saw outflows from their equity markets in 2023. The South African Reserve Bank has reported that foreign direct investment (FDI) inflows moderated to R96.5 billion in 2023, down from R151 billion in 2022. But when the numbers are put into a global context, the South African situation is not as dire or unusual as it might seem.
UNCTAD’s Global Investment Trends Monitor reflects a steep decline in global foreign FDI flows in 2023. While FDI grew 3% to an estimated $1.37 trillion, growth was driven mainly by a few European “conduit” economies. When these are excluded, global FDI flows show an 18% decline. FDI in developing economies fell 9%.
While we maintain a strong offshore bias and believe South Africa will underperform without major economic reforms, it is also clear that the picture is more nuanced than a complete collapse in FDI or investor confidence. Like many other emerging markets, South Africa seems destined to muddle through for the foreseeable future.
“Many would expect that outflows would overshadow inflows. However, data from the South African Reserve Bank shows that the country’s net FDI flows averaged R58 billion per annum after the global financial crisis when excluding 2021.”
– PwC’s April Economic Outlook bulletin
Global News
- The S&P 500 index closed less than 1% away from its all-time high on Thursday, fuelled by earnings optimism and US data that supported the case for interest-rate cuts. The rebound in stocks found fresh momentum from US unemployment claims, which came in at their highest in 18 months. Meanwhile, so-called value and cyclical sectors are helping to broaden out a rally that has previously been boosted by tech giants. With more than 400 firms in the S&P 500 Index having reported earnings this season, 79% have exceeded earnings expectations, according to data compiled by Bloomberg Intelligence.
- On the geopolitical front, Vladimir Putin, the longest-serving Kremlin ruler since Soviet dictator Josef Stalin, was sworn in for a fifth term as president on Tuesday, amid renewed nuclear sabre-rattling with the West over his war in Ukraine. He’s embroiled in a deepening confrontation with the US and its allies, which have sent Ukraine tens of billions of dollars of weapons to defend itself against Russia’s 2022 invasion that sparked Europe’s worst conflict since World War II.
- Israel has racked up a $16 billion bill after seven months of war, leaving its budget deficit on a path to calamity unless government acts. As the war’s financial toll grows, the country is on track to run one of its widest budget deficits this century. Expenditure surged almost 36% in the first four months of 2024 from the same period a year earlier, of which roughly two-thirds went toward defence outlays.
- During a two-day visit to France, Chinese President Xi Jinping has spoken out against criticism of his country for its close relationship with Russia during the war in Ukraine. He seemed to be targeting the US, which believes that China continues to aid Moscow’s war in Ukraine by providing satellite imagery to Russian forces along with jet fighter parts, microchips, and other dual-use equipment.
- The EU is prepared to use all the tools available to defend its economies if China fails to offer fair access to its markets, European Commission President Ursula von der Leyen said after talks with Xi in Paris. She said that heavily subsidised Chinese products such as electric vehicles and steel are flooding Europe, and the world cannot absorb China’s surplus production. Von der Leyden said that, for trade to be fair, it needs to be reciprocal.
- The Bank of England has kept its key rate on hold at 5.25% as governor Andrew Bailey said a rate cut in June is neither “ruled out or planned”. Traders have priced in a 50% chance of a reduction next month. The pound hit a two-week low against the dollar.
- TikTok has gone to court to block a US law that could force a nationwide ban of the popular App, following through on legal threats the company issued after President Joe Biden signed the legislation last month. The historic legal battle will determine whether US security concerns about TikTok’s links to China can trump the First Amendment rights of TikTok’s 170 million US users.
- As a result of the US ban on American companies shipping components to China, Intel expects second-quarter revenue to fall below the midpoint of previously issued projections. Revenue will remain within the previously guided range of $12.5 billion to $13.5 billion, Intel said in a statement Wednesday, “but below the midpoint.” The company said it continues to expect revenue and earnings per share to grow in 2024 from a year earlier.
- Microsoft is spending $3.3 billion on building a data hub in Wisconsin that aims to train employees and manufacturers on how to best use AI. The new centre aims to create 2,300 union construction jobs and 2,000 permanent jobs over time, according to Microsoft. It will also be used to train about 100,000 workers across the state on generative AI by 2030.
- Uber’s surprise first-quarter loss and its forecast of gross bookings in the second quarter being below Wall Street expectations, sent its shares down nearly 9% on Wednesday. Uber reported a net loss of $654 million, driven by legal charges and provisions and those related to fair valuation of certain company investments. Analysts were expecting a net profit of $503.1 million.
- BP’s electric vehicle charging arm is keen to snap up Tesla supercharging sites across the US along with the workers behind them after Tesla said it would be closing the unit down. The fuel company has pledged $1 billion to expand its network by 2030, including installing more than 3,000 charging points in the next few years.
- As at Thursday’s close the S&P 500 was 1.7% up for the week.
Local News
- Shell South Africa has said it has undertaken a comprehensive review of the downstream and renewables businesses across all regions and markets in line with its focus on performance, discipline, and simplification. As a result, it will divest shareholding in its retail business. It is now focusing on its upstream operations, which are facing serious legal challenges from environmental groups. Thebe Investment Corporation is in a dispute with Shell over the value of its 28% stake in the retail operations.
- BNP Paribas has closed its corporate and investment bank in South Africa which is the latest example of a European bank scaling back on the continent. Barclays and Standard Chartered have both scaled back in Africa, while rival Societe Generale is also cutting its footprint on the continent.
- The ANC is pinning its hopes on the Eastern Cape to pull in the votes it expects to lose in KZN because of support for Jacob Zuma’s MK party. It is also keen on winning in Limpopo and Mpumalanga, which are among the provinces it considers its strong voting bases, to ensure it keeps its majority in the national election. According to the latest survey by global market research company Ipsos, ANC support could fall to 40.2% while the MK party, founded in December 2023, could receive as much as 8.4% of the votes.
- Increasing concerns about crime and corruption are key in the runup to the May 29 elections, according to the Global Initiative Against Transnational Organized Crime. South Africa has one of the highest crime rates in the world. The number of murders was just under 27,500 last year, up about one-third from 2019. The World Bank estimates that criminal activity shaves 10%, or $40 billion a year, from the gross domestic product.
- Deputy finance minister David Masondo says President Cyril Ramaphosa’s economic reform agenda is at the risk of stalling should the country be presided over by an “unstable coalition” after May’s general elections. Many of the reforms underway needed several years to follow through to full implementation “especially where new institutions are required”. With uncertainty around the elections mounting, Dynasty is actively externalising funds at around the R18.40/$ level, which is also close to our ‘fair value” model of R18.15/$.
- Writing for BusinessLIVE, Justice Malala says, that should the ANC lose the elections, Ramaphosa is bound to resign, leaving the party to be led by deputy president Paul Mashatile. In the second-biggest party, the DA, there is a full-on whispering campaign that John Steenhuisen is yesterday’s man. Meanwhile, if Zuma chose to become an MP, he would lose his presidential perks and bodyguards. He is unlikely to do that and instead will stay out of parliament but run the party.
- Six successive shocks over the past three years have cost South Africa’s economy as much as R850 billion based on estimates from the Department of Trade, Industry, and Competition. The shocks were listed as the global pandemic, the worst civil unrest since apartheid in July 2021, the war in Ukraine, severe flooding in the eastern coastal province of KwaZulu-Natal in 2022, rolling blackouts, and logistics constraints.
- The annual financial statements of state-owned enterprises show that seven of around 30 SOEs have been suffering losses every year since 2017, and that the losses are increasing every year. Eskom leads in terms of the sheer magnitude of annual losses, as it posted annual losses of more than R20 billion in three of the last seven years and a total loss of R103 billion from 2017 to 2023. Others, such as SAA, the SABC, and Denel continue to report losses of billions of rand each year while running operations that are much smaller than Eskom.
- The only reason there haven’t been any rolling blackouts for the past 40-odd days is because the utility was burning diesel at a “rate of knots”, claims former Eskom CEO André de Ruyter. During his time at Eskom, there was a R6 billion budget for diesel, which has gone up four times more to R24 billion. However, the Presidency and organised business have stated that they remain committed to their forecast that higher stages of Eskom blackouts will end in 2024. If load shedding persists during the year, the worst-case scenario is that it will be restricted to the lower stages.
- Government’s plans for National Health Insurance (NHI) will likely take many years to implement and it will not all be promulgated at once, according to National Treasury’s chief director for health and social development, Mark Blecher. This is because there is limited scope to fund it with higher taxes. The health department has previously said it expects to raise an additional R200 billion for NHI with taxes.
- The manufacturing sector performed far below expectations in March, raising risks of GDP contracting in the first quarter of 2024, according to data from Statistics South Africa. The bureau said that manufacturing production decreased 6.4% in March 2024 compared with March 2023, after increasing 4.1% in February. This comes after five consecutive months of growth.
- Online retail giant Amazon.com launched a South African shopping portal with a co.za domain on Tuesday as it seeks to capture some of the more than a third of South African adults who shop online. It promises a reliable online shopping experience among other benefits as it goes head-to-head with Takealot, South Africa’s biggest online retailer.
- As at the time of writing, the rand was 0.5% stronger and the ALSI was 3% up for the week.
Sources: Dynasty, BusinessLIVE, Business Report, Moneyweb. CNN, Bloomberg, TimesLIVE, NYT, Daily Maverick, Reuters, Businesstech, unctad,org, etc.