Foreign companies shy away fro

Foreign companies shy away from Mzansi as CPI rises

A recent Bank of America poll shows a worrying trend in investment, as stability in emerging markets is widely considered the most important factor for future investments

Foreign companies shy away fro


THE economic prospect for South Africa doesn’t seem to look too promising, as the Consumer Price Index (CPI) accelerated to 5.8 per cent year-on-year in January, according to Statistics South Africa (Stats SA). This rate was 0.4 per cent higher than the corresponding annual rate of 5.4 per cent in December 2013, while market expectation had been for CPI to come in at 5.7 per cent year-on-year. Stats SA also stated that prices had witnessed an overall increase by 0.7 per cent between December 2013 and January 2014, blaming the problem largely on rand devaluation.

“The latest figures highlight the inflationary pressures emanating directly from the weaker currency as the monthly rise mainly stems from higher food and fuel prices. Despite little evidence so far of second round effects, inflation is likely to continue rising, breaching the Reserve Bank’s 6 per cent upper target range in the second quarter of the year and remaining above 6 per cent for a few months after that,” commented a Nedbank economist on the trend.

Nedbank analysts expect the Reserve Bank to raise the repurchase rate by 50 basis points at its next Monetary Policy Committee meeting, which is scheduled for 25 – 27 March. However, the central bank is expected to keep rates steady until the second half of 2015 due to the weak economy and more settled markets, hoping to keep borrowing trends steady.

None of these figures, however, seem to resound too well with foreign investors, as investment in South Africa has also been slowing down accordingly amid growing concerns about long-term stability for the local economy. Downward trends in the developing world on the whole add to the pessimistic picture painted for prospective investors in South Africa, including stagnation on the Chinese market, which pumps billions into the South African economy.

According to a Bank of America (BofA) survey carried out monthly on behalf of its investment bank division Merrill Lynch, investors seem to shy away from emerging markets, especially South Africa, over concerns about over-stretched equity valuations on the Johannesburg stock exchange.

John Bilton, European investment strategist at BofA (Merrill Lynch), said that the ongoing weakness of the rand was of chief concern among all considerations, adding that there may be a silver lining on the long run: “What it is punished for is the weakness persisting in the commodity market. That said, remember South Africa actually has a number of high-quality companies. When we see a period of de-risking in global markets, South Africa oddly enough is one of the emerging market countries that can do a little better because of its low beta.”

By Sertan Sanderson, 2014