SA faced the classic “Wall Street vs Main Street” contrast this week as it pulled out the stops to try to attract desperately needed fixed investment into the real economy — but instead found itself the beneficiary of a renewed surge of flows into the financial economy, particularly the bond market.
President Cyril Ramaphosa’s third investment conference ended on Wednesday with an unexpectedly robust R110bn in new investment pledges, adding to the R664bn that had already been pledged at the 2018 and 2019 conferences.
But economists noted that more than half of the new pledges are effectively loan or investment facilities rather than actual job-creating investment projects. And Ramaphosa himself said, as he opened the conference, that so far only R172bn of the money pledged at the first two conferences had been spent.
Meanwhile a strong shift to a “risk-on” environment in global markets this month has seen the rand and bond yields rally to levels last seen before the Covid crisis as foreign portfolio investors came back into SA’s financial markets.
Economists said US president-elect Joe Biden’s victory in the US election has driven the “risk-on” rally, as has positive news about a Covid-19 vaccine.
This week’s decision by the Reserve Bank's monetary policy committee to hold the benchmark interest rate at 3.5% will have helped to support the sentiment, for now.
The yield on the 10-year government bond narrowed to 8.80% this week, from 9.37% on November 4. The rand, which crashed to almost R19 to the dollar in March and traded in a R16.40-R16.60 range since then, rallied to the mid-R15 range this month. The most recent JSE weekly data show both the bond and equity markets saw net foreign inflows for the week ended November 13, though for the year to date they have still seen sizeable net outflows.
Absa fixed investment strategist Mamoketi Lijane said the rally was driven by global factors and domestic ones, because SA’s bond yields have been very cheap relative to its peers. It was a relief rally that reflected the certainty markets gained after the “event risk” of the presidential election in the US and the medium-term budget at home — and it could last into early next year.
But the disconnect between financial and real economy flows would remain: “Until such time as you have growth expectations themselves improving in the real economy, the money stays trapped in the financial economy,” Lijane said.
Is it simply a beauty pageant of people saying what they would have done anyway?
— Hugo Pienaar, Bureau for Economic Research economist
Citi economist Gina Schoeman said foreign investors who fled SA earlier in the year, causing a massive steepening in yields on concerns about the country’s fiscal position, were coming up to speed on its vulnerability relative to other emerging markets and had recognised that its massive domestic investor base makes it less vulnerable.
The “big signal” from the monetary policy committee in its past two meetings was that it has become more orthodox again, after frontloading 300 basis points of interest rate cuts to support the economy earlier in the year. That could help to support inflows.
Bureau for Economic Research economist Hugo Pienaar argued, however, that the foreign bond buying that has come back so far in November has nothing to do with SA.
In the current environment of poor growth prospects for SA and a “wait and see” attitude on whether the country will implement reforms, foreign direct investment will remain quite sparse.
Actual real fixed investment spending since 2018 has been very poor, Pienaar said. “My question always with these investment conferences is are these new commitments or is it simply a beauty pageant of people saying what they would have done anyway,” Pienaar said.
He noted that almost R52bn of the R110bn of pledges is financing, rather than fixed investment.
The 2020 Investment Conference list released at this week's conference shows the largest single commitment, of almost R33bn, is from the New Development (Brics) Bank, with further financing made available by the Industrial Development Corporation, Old Mutual Alternative Investments and Sanlam. Heading the list of investment project pledges were Telkom, PepsiCo, Jurgens Construction and Sasol.
Stanlib economist Kevin Lings said there is merit in having a conference, because Ramaphosa undertook to do so on an annual basis, but there is always the risk of overstating how much investment is likely to happen because of the need to create the impression of success.
The second conference last year was already less credible than the first in 2018 and this year’s was even less credible. Lings said the government’s infrastructure investment drive has now become the focal point.
“The conference has earned its place at the centre of our economic policy agenda,” Ramaphosa told the conference plenary session on Wednesday. He said of the R172bn in 102 projects that had flowed since the first conference in 2018, the greatest flow of investment had been into mining (R63.6bn), ICT (R31bn) and the auto sector (R23bn).
Over the past two years 19 of the investment projects had been completed or launched and 44 — representing 57% of total investment — are under construction, with another 12 in early stages. About 10% of the total (21 projects) have been put on hold or cancelled because of Covid.
The Bank committee said in its statement this week that it now expects a 50% rebound in the economy in the third quarter, but the economy will contract by 8% this year — a slightly better forecast than the 8.2% forecast at its last meeting two months ago.
