POSITIVE VIBRATIONS
Hosting top sporting events exposes South Africa’s many wonderful aspects
SPORT is a national obsession in South Africa, and many observers have noted that the international sporting boycott of the country in the 1970s and 1980s played a pivotal role in bringing apartheid to an end. For many people in South Africa, the sign that the hated apartheid era was finally over was when newly installed president Nelson Mandela, wearing a Springbok jersey, handed the Rugby World Cup to the captain of our country’s winning team.
This year marks the 20th anniversary of that momentous event, and while South Africa’s progress in this year’s Rugby World Cup may be more precarious, overstating sport’s importance in the country remains difficult.
South Africa has gone on to host a number of international sporting events including the Cricket World Cup along with Kenya and Zimbabwe in 2003, and the Soccer World Cup in 2010.
New and refurbished infrastructure in terms of stadiums, transportation and accommodation created numerous employment opportunities, and developed expertise with invaluable experience in hosting world-class tournaments.
International audience
These events showcased South Africa’s ability to organise and host huge competitions on the world stage. It also exposed the many wonderful aspects of the country to an international audience that would not otherwise have paid much attention to South Africa.
The lasting legacy of these sorts of events in terms of the economy has mainly been in tourism opportunities. Cape Town, for example, is a truly world-class destination with many alluring features, including natural beauty, fine dining and even adventure sports.
South Africa’s gross domestic product (GDP) growth is projected at 1.5 percent this year, steady with 1.5 percent in 2014. While this figure is positive, I believe the country has the potential to grow it at a higher rate.
The electricity crisis is one factor that has stunted growth this year, as controlled power cuts and outages to relieve pressure on the grid have curbed productive activity, particularly in industry.
South Africa and its neighbours (including Namibia – a fellow Rugby World Cup participant this year) are rich in natural resources like gold, diamonds and even uranium. In South Africa specifically, the mining sector represented 8.3 percent of 2013’s GDP in nominal terms, with primary mineral exports at 22.7 percent of total exports.
The sector is clearly critical to the overall health of the country’s economy. In recent years, however, it has been hamstrung by lack of capacity in terms of electricity production, and ageing infrastructure at many mines which has added to costs.
In times of lower commodity prices, companies look to manage costs, so there tends to be a significant focus on efficiency. Also, some mining assets simply become unsustainable in lower-price environments. Unfortunately that is when there is pressure on the employment level.
Without a doubt, we see the stubbornly high unemployment level (at about 25 percent) as the most significant challenge South Africa currently faces. It is a major obstacle to improving the quality of life for a large portion of the population.
At the same time, the tax receipt base is under pressure because of lower corporate profits, so the burden shifts more towards income and consumption tax to fund the government’s various support programmes like child and old-age grants.
Given the slowdown we are seeing in the commodity space, many companies involved in this area are hard-pressed to manage costs, resulting in further negative implications for employment.
In my view, it is critical the government, labour unions and employers work together to create a more flexible labour environment that is not as fixated on high entry-level wages, but rather focuses on improving the overall level of employment.
I believe South Africa’s leaders need to take note of constructive criticism and be more willing to acknowledge and rectify mistakes. A key case in point would be the visa regulations introduced recently.
Visitors from important tourist markets like China now have to apply for visas in person to have biometric data captured. This makes the process time-consuming and expensive, especially if the prospective visitors have to travel long distances to visa processing centres.
In addition, families travelling with children need to have unabridged birth certificates as well as passports for the children, a rule enacted this year to help prevent child trafficking on the continent but one that adds a further layer of complexity and bureaucracy for tourists. At a time when the weaker South African currency (the rand) should make South Africa a really attractive tourist destination for international visitors, the country is actually experiencing a decline in visitor numbers.
South Africa’s stock market has been performing fairly well this year – it is up 5.6 percent this year to date in light of recent global market volatility and despite weak internal fundamentals.
Looking at the companies that have had good share price performances in recent months, we have seen one relatively common theme: offshore exposure of the underlying operations.
As the South African rand has trended lower against the US dollar and other major currencies, the contribution from nonSouth African operations became more meaningful and so translated into a hedge against the currency movements to a certain extent.
That, coupled with generally strong balance sheets and strong management teams, made South African investments more attractive to many investors, compared, for example, with the situation in Brazil in which the markets have been extremely volatile.
South Africa has been spared the recent global market volatility to a large extent, in spite of the substantial weakening of the rand relative to the US dollar and other major trading currencies.
The recent decline in oil prices has proved to be a massive boon in limiting the impact of inflation in South Africa. Consumer spending has been relatively resilient, especially among the higher income groups.
Those people who are gainfully employed are typically getting wage increases in excess of the overall inflation rate, and this tends to translate into higher spending. We have seen a slowdown in the purchases of consumer durables such as new vehicles, as financing becomes more onerous on the back of higher interest rates. But we think some of this is likely to have a short-term positive effect on consumer non-durables.
Looking at the corporates, we have found companies in South Africa tend to be conservatively managed and rarely have high debt levels, so we think the prospect of a further increase in interest rates is unlikely to have a major impact on the financials of local companies.
Turning to other areas of the continent, African markets that import oil-related products – Kenya, for example – will probably have experienced lower inflationary pressures thanks to the drop in the international price of oil.
Measured approach
At the same time, foreign exchange earnings in Kenya have come under pressure from lower tourism numbers. This is because of safety concerns and a decline in some main exports such as coffee.
Overall, the fiscal situation in Kenya still looks relatively benign to us with the central bank taking a more measured approach to interest-rate hikes compared with the last cycle, when consumers and corporates alike were surprised by the rapid and severe hike in rates.
For oil exporters in Africa like Nigeria and Angola, it is a different story. Lower oil prices have seen foreign exchange earnings slashed, and governments will have to deal with ballooning budget deficits in the current price environment.
Nigeria is trying to defend its currency but finding it increasingly difficult to do so. Investor confidence has also taken a hit from President Muhammadu Buhari’s long delay in announcing his cabinet.
This situation has, however, created some interesting opportunities in Nigeria in consumer and banking names, which are now trading at what we view as attractive valuations.
Of course, there is likely to be more short-term pain, but given favourable demographics and the potential to generate higher levels of overall wealth over the longer term, Nigeria remains an exciting market for us.
Our leaders need to take note of constructive criticism and be more willing to acknowledge and rectify mistakes like the recent visa regulations.