BUSINESS MAVERICK: OP-ED
Eskom powers SA on to global list of top 10 Outrageous Predictions
South Africa’s Eskom woes have vaulted the country on to Saxo Bank’s tongue-in-cheek 2020 Outrageous Predictions. But the prediction that creditors could turn their back on the country as a result of the electricity utility’s parlous state doesn’t seem quite as far-fetched, coming out during a week when rolling blackouts take hold again and there’s a surprise decline in the growth rate.
South Africa had the dubious pleasure of being the only emerging market to feature on Saxo Bank’s annual list of 10 Outrageous Predictions published last week. The Danish bank predicts that the lights could go out for South Africa next year when creditors turn their back on the country as a result of “the ESKOM fiasco”.
Every year Saxo Bank publishes its tongue-in-cheek predictions that, says chief economist Steen Jakobsen, are “an exercise in provoking you to think differently”. Last year’s theme was Enough is Enough against a global backdrop in which “the debt mountain keeps mounting and the populist movement keeps rising”.
In December last year, Jakobsen was prescient in saying 2019 would be a volatile exercise. In a sign of exceptionally unpredictable times, one of the Outrageous Predictions did actually come to fruition. The US Federal Reserve did cut rates as outrageously predicted by Saxo Bank.
This year, ironically, the prediction that South Africa would be “electrocuted” by Eskom was released as load shedding took hold again across the country. The rolling blackouts also followed hot on the heels of another unexpected contraction in growth in gross domestic product (GDP) in the third quarter.
On the 0.6% decline in GDP, the Bureau for Economic Research (BER) noted that, while it had warned of the possibility of a GDP decline, the extent of the weakness was more severe than anticipated.
Slowing growth may be the least of our worries, however, if Saxo Bank’s Outrageous Prediction that creditors do cut their lines to the rainbow nation comes true. Saxo Bank global macro strategist Kay Van-Petersen says the “ESKOM fiasco” could be the straw that “breaks the back of creditors’ willingness to continue funding a country that hasn’t had its financial or governance house in order for decades”.
The fallout if its prediction does transpire: the rand-dollar exchange rate depreciates 30% to R20 to the dollar from about R15 to the dollar currently. The bank adds that other uncreditworthy emerging markets would be drawn into the abyss as well, resulting in emerging market economies experiencing the most differentiated performance in years.
This dire foreign exchange rate prediction comes on the back of a domestic currency that has been reasonably well behaved notwithstanding many setbacks this year and, in fact, many years before that. Saxo Bank points out that at the end of 2007 when the Springboks last won the Rugby World Cup, the rand was trading at R7 to the dollar. The significance of this, according to the bank is that “in carry-adjusted terms, the rand has fallen far less — only some six percent, though with plenty of volatility along the way. That is a near-miraculous feat, given the bad news.”
Van-Petersen also quantifies the stark contraction in the South African economy from the 2007 World Cup win to the second quarter of 2018, when the nominal growth in the economy in dollar terms was less than 10%: “That rise may seem small,” he says, “but in constant US dollar terms (adjusted for US CPI), this means that the South African economy has shrunk a staggering 9% over the last 12 years.”
As witnessed in last week’s growth figures, the economic growth environment has deteriorated even further since then, which doesn’t bode well for the country’s economic outlook. Although quarterly numbers can be volatile, says Old Mutual Multi-Managers investment strategist Izak Odendaal, he points out that there was no growth in the four quarters to end September.
“It looks like 2019 growth will be even lower than last year’s already-low 0.8%. It is truly a sad state of affairs.”
Growth for the remainder of the year doesn’t look promising either. Says the BER: “Unfortunately, early data releases for Q4 do not bode well for a strong recovery. Indeed, a continuation of last week’s load shedding could further dent growth in Q4, not boding well for the fourth-quarter growth.”
Fortunately, it wasn’t all bad news in the growth numbers. Odendaal points out the one sliver of good news. Real fixed investment spending increased for the second consecutive quarter, largely driven by business spending on machinery and equipment. He notes that private sector fixed investment posted 11% growth in the quarter, while government investment spending declined for the seventh consecutive quarter.
As South Africans keep their candles lined up in anticipation of the next bout of load shedding, it is worth considering what the odds are of Saxo Bank’s dire prognosis becoming a reality. Prudential Investment Management doesn’t believe it is likely because South Africa’s government bonds have the second-longest maturity structure, behind the UK. With repayments spread over such a lengthy period, the government is unlikely to face an IMF bailout or fall off a fiscal cliff any time soon.
In addition, the government also has a relatively low amount of foreign debt, at only about 10% of the total, with an average maturity of about 10 years, Prudential investment Managers Chief Investment Officer David Knee points out.
Also, the latest International Institute of Finance figures shows that, notwithstanding the negative news that has prevailed this year, South Africa has managed to attract emerging market portfolio flows of $2.9-billion during the first half of this year and it predicts the country will attract $14.9-billion for the year as a whole, These flows stack up reasonably well against those other emerging markets that are also expected to see positive flows this year.
South Africa has a long history of economic and political resilience and, although at times it is undoubtedly hard to find a silver lining, the balance of evidence suggests there is very little chance of Saxo Bank’s South African Outrageous Prediction becoming a reality next year. BM