Many foreign investors are currently adopting a “wait and see” attitude towards investing in South Africa, despite the country’s many positive factors and perceptions of it having a relatively moderate risk-reward payoff over five years, according to a newly released report on foreign investor perceptions of South Africa compiled by Russell 20-20.
Representatives of Russell 20-20, a US-based non-profit association comprised of international investment managers and pension funds, visited South Africa in the week of October 19 to brief South African government and business leaders. The report, Russell EMPulse, was presented to President Thabo Mbeki, having been developed as a tool to convey perceptions of emerging markets as an indicator for government and business leaders, as well as investors.
It represents the results of a series of interviews conducted primarily from June to August 2003 with senior decision-makers in 39 leading international money management firms (investors) with combined assets under management of approximately $6,8-trillion.
In the report, South Africa scored relatively high in the areas of its banking system, capital markets, corporate governance, rule of law, political stability and macroeconomic fundamentals compared to developed markets.
More neutral factors were external liquidity and the government’s administrative effectiveness, while negative areas included competitiveness, concerns over government’s involvement in the marketplace and, lowest of all, illegal practices.
Investors commended the South African government for its economic management, citing in particular its small budget deficit and low external debt. They were encouraged that inflation and interest rates were falling, believed that the outlook for foreign exchange reserves was positive, and that these and other economic trends would lead to higher GDP growth.
At the same time, they perceived that South Africa had matured into a sophisticated and stable market characterized by strong legal and financial institutions. This was reflected in relatively high ratings given to the rule of law, banking system, capital markets and corporate governance categories — noting that South African corporate governance standards were among the best in emerging markets.
Against this backdrop of a solid structural foundation and positive economic trends, however, investors identified several critical priorities for the South African government and business leaders, including the HIV-Aids crisis and uncertainty surrounding the black economic empowerment (BEE) process. While agreeing in principle with the government’s goals behind BEE, they were concerned about the parameters of the programme and its potential financial impact on companies.
Investors also noted the country’s relatively low GDP growth rates, especially relative to many South American and Asian countries. They emphasised the need to generate economic growth significantly higher than the current 2-3% rate, given high levels of poverty and unemployment, and to reduce the inequalities in standards of living.
Another concern cited by investors was the very high volatility of the rand in the past two years-depreciating nearly 60% in 2001 before appreciating another 40% subsequently. Such dramatic swings made effective economic and corporate management extremely difficult, they noted. Continuing capital controls on South African residents were also still distorting the true value of rand.
Investors also viewed crime as a serious issue in South Africa–however, this was not a key priority for them. High rates of violent crime had a negative impact on the business and investment climate, and the police and court systems were overburdened.
Another serious issue was the need for significant improvements in labour productivity through skills development and training, given high real wage increases.
These positive and negative factors virtually balanced each other out in the report, with investors scoring South Africa as a neutral or moderate investment risk overall. Over the next five years the country was viewed as having a moderate risk-reward payout in the emerging market universe-seen as a defensive play with a more mature and stable market than other emerging markets.
With growth prospects not as favorable as in many other emerging market countries, however, 65% of investors using a benchmark for their emerging market portfolios were underweight in their allocation to South Africa versus the benchmark.
While valuations were relatively compelling, they observed, South African companies faced a number of risks in terms of their ability to control costs, including currency appreciation and volatility, the HIV-Aids crisis and the impact of BEE.
“Investors are taking a ‘wait and see’ approach, with close to half of investors expecting their allocations to South Africa to remain the same over the next five years,” the report concluded.
On a positive note, more than double the number of investors surveyed were positive about the country’s future prospects than negative. – I-Net Bridge