Outside influences and inherent weaknesses are steering the South African economy. Aeon Investment Management’s chief investment officer, Asief Mohamed, and portfolio manager and analyst, Zaid Paruk, share their views.

Reuben Brigety, the current US ambassador to South Africa, recently caused a stir with his comments that South Africa sold arms to Russia. Within hours, the Rand sold off, highlighting possible fears that South Africa may be sanctioned, with future AGOA negotiation extensions seemingly to be impacted by the geopolitical fallout.

The fears were not unfounded. AGOA currently provides duty-free access to the American market for around 1800 products – in addition to the 5000 or so under the Generalized System of Preferences (GSP). South Africa exports around $3bn to the US, such as motor vehicles, jewellery, ferroalloys, fruit and nuts, beverages, and spirits. Markets tend to react and price in the odds of events very quickly, and again portrayed how vulnerable our economy is to existential news. 

However, the market had quickly forgotten how last year Brigety sent out a security alert to US citizens in South Africa warning of a possible terror attack in Johannesburg’s wealthy Sandton area without providing any evidence.

Brigety also once called ex-President Donald Trump “America’s first Nazi-in-Chief”, and faced a backlash in the US from conservative elements. Whilst Brigety’s credibility can be questioned, the damage was not done by Brigety alone. Markets react to sentiment, and the reaction was brutal. Economically, the Rand weakness has already been impacted by many factors such as the global environment, commodity prices, terms of trade, and load shedding. Around 91% of SA companies say the political climate is a constraint to growth (BER report), a near record worst level. Brigety’s comments seemingly just accentuated the already bad news priced in, proving a catalyst for markets to react further.

Unsurprisingly, the ANC machine quickly went into overdrive calling for investigations and sub-committees to defend whether any action took place. It did not matter if it was true or not, defend or deflect are the only “arms” the ANC has. Seemingly, Brigety’s comments sought to push South Africa back towards “neutral” status, by directing a hard tone of “you are either with us or against us”. As Russian (and Chinese) influence grows within the African continent and globally, the US has tried to build relationships without pushing countries further into Russian arms. However, the reaction has not been as hoped, with the ANC coming out strongly against Brigety. Historically, the ANC and Russia have always maintained good relations and Russia is alleged to support the ANC financially, but under the Zuma administration South Africa’s alignment moved closer to Russia, and to this day remains so.

The latest debacle was nothing new to US foreign policy, and the ANC leadership’s handling of it was not either. ANC leaders want to be applauded for putting out self-inflicted fires. The disarranged, disconnected, and disunited ANC no longer speaks in one voice, but rather has varied goals and objectives. A trust deficit from the population and a leadership deficit in the party continue to weigh on the country and its ability to move forward. South Africa is a place full of untapped potential, but like a value trap, it can continue to be this way without any lever to unlock the value. In this case, stable leadership, progressive and business-friendly regulation, and more than anything, accountability for wrongdoing should be the only order of the day. It is true that government does not create jobs, but rather creates a conducive environment for businesses to thrive. If government can talk with one voice and vision, and then carry out this vision systematically, South Africa will thrive as a nation. For now, municipalities around the country and the state of national SOEs leave much to be desired.

As for Lady R, encouragingly there has been a de-escalation from both sides. The issue has softened, but certainly not disappeared. South Africa could have some economic ramifications that may affect some businesses and economic markets. While we wait to see if Brigety’s comments were hogwash or not, the damage at least in the short term has already been done, and has again exposed South Africa’s weaknesses.

aeonim.co.za