Riots and stringent COVID-19 regulations caused significant damage to the South African economy at the start of the third quarter, according to new data released on Wednesday.
More than 300 people were killed and hundreds of businesses were robbed as some of the worst violence seen in South Africa since the end of apartheid erupted shortly after the arrest of former president Jacob Zuma in July.
According to Capital Economics, the retail sales statistics, along with weak July manufacturing data released last week, increase the possibility that the economy could shrink during the third quarter as a whole, putting the recovery from the coronavirus epidemic on shaky ground.
With this background in mind, the central bank is unlikely to be in a hurry to follow the lead of its counterparts in other parts of the developing world and increase interest rates, according to a research note.
In a note to clients on Tuesday, JPMorgan said that a number of indicators, including worsening in key terms of trade, indicated that the rand was at risk.
Stocks on the Johannesburg Major Exchange edged higher on Wednesday, but sluggish Chinese industrial production and retail sales held gains in check, as they did elsewhere on the world’s stock markets.
The fate of several major South African corporations, such as tech investor Naspers, luxury goods manufacturer Richemont, and mining businesses, are intimately tied to the fortunes of Chinese companies.
For the most part, trading on the Johannesburg Stock Exchange was quiet, but two important indexes concluded the day in positive territory: the blue-chip Top-40 index, which ended the day up 0.2 percent at 58,230 points; and the All-share index, which finished the day up 0.13 percent at 64,385 points.
When it comes to the effect on the industry, however, the picture is not as bleak as it seems. South Africa’s economy was expected to lose R7.5 billion per year as a consequence of new visa regulations; nevertheless, according to statistics gathered from entry ports, the number of visitors over the holiday season in 2015 increased by 7% when measured against the same period in 2014. Foreign exchange depreciation, according to South African Forex brokers, has always been a good element for the outsourcing sector since it allows purchasers of outsourced services to get them at a lower cost than they would otherwise be able to. The same has been true for major outsourcing centers, both established and developing, in recent years.
A number of variables that are comparable to those that exist in India may help to develop the local outsourcing sector in South Africa. As part of its efforts to establish outsourcing as a significant source of job creation in the nation, the South African government is collaborating with Business Process Enabling South Africa (BPESA), a South African business process investment and networking organization. Additionally, the South African government has launched a slew of measures to encourage the use of outsourcing services. In order to encourage international investment, the administration has even relaxed restrictions.
Approximately 2 million visitors visited the nation over the five-week period from the first of December 2015 to the seventh of January 2016. The continent of Asia received the greatest number of these tourists (15 percent ). Wine tourists flock to South Africa, which is the world’s seventh biggest wine producer and the most visited country in the world.
Similarly, the business process outsourcing (BPO) industry has benefited from the devaluation of the Rand. Because of the depreciation of the Rand, South Africa has emerged as a cost-competitive outsourcing destination for businesses located outside of the United States and the European Union. It is a significant advantage that the nation shares time zone and cultural commonalities with these geographical areas as well.
In fact, the vast bulk of the profits generated by JSE-listed businesses are earned outside of South Africa.
Nevertheless, headwinds in the global environment may also affect the local exchange, and a worsening fiscal position, as well as structural economic problems, could have a negative impact on the prospects of businesses that exclusively operate in South Africa. As a result, investors should seek exposure to businesses that have some kind of protection from the local environment.
Additionally, although the JSE has historically served as a good proxy for emerging markets, as more and more developing countries become increasingly focused on the Asian market, investors should consider adding additional emerging market exposure to achieve real diversity.
Investors should instead consider withdrawing profits or even going underweight in the bond market in order to avoid becoming overconfident.
Yields have now recovered to 9 percent, apparently oblivious to the reality that our fiscal position has worsened considerably as the result of the epidemic, and that our fiscal deficit will be double the amount predicted at the start of 2020.
Because of this, he believes that the local bond market will be unable to maintain its present levels for an extended period of time.