Five tough years ahead for South Africa-DAILY INVESTOR

[Nat Quinn]

Efficient Group chief economist Dawie Roodt warned that South Africa is in deep trouble and faces a tough five years as the country transitions.

Roodt told Biznews that South Africa faces three main challenges a new government must address.

Local authorities are a mess and financially unstable. They owe Eskom R75 billion and will ask the Finance Minister for money to continue operating.

“The local authorities are extremely important because they are responsible for giving people electricity, water, and roads,” he said.

State-owned enterprises are equally disastrous. Most of them have collapsed because of mismanagement and corruption.

“Just about all the state-owned enterprises have been run into the ground financially and operationally,” he said.

South Africa’s national accounts are in a dismal state and have become unsustainable, with debt of between 75% and 90% of GDP.

“Our debt has reached very high levels and is increasing at around 3% per year. That is unsustainable,” he said.

He added that many other problems, including labour policies and trade issues, also need to be fixed.

Because of the dismal state of the country, the ANC is losing support and that South Africa is in a transition period, similar to 1994.

“The next five years are going to be very difficult because it is a transition period where we are getting rid of the ruling party,” he said.

Investors can benefit from a positive election outcome

Efficient Group chief economist Dawie Roodt

Despite South Africa’s significant challenges, it is not all doom and gloom. South Africa’s financial markets can rally on a good election outcome.

Roodt said the best scenario would be for the ANC to get between 45% and 50% and form a collation with right-leaning political parties.

This scenario will be good for the economy, bolster the equity and bond markets, and strengthen the rand.

Roodt said JSE is between 30% and 50% behind similar global markets. A good news story can increase the JSE by 20% to 30%.

“The JSE is a highly undervalued market. That means that equities are very cheap in South Africa,” he said.

South Africa’s capital market is also cheap and gives yields of around 10%. “A positive election outcome can bolster the capital market by 200 basis points,” Roodt said.

Another beneficiary of favourable election results is the rand’s exchange rate. Although the rand has strengthened in recent weeks, it is still undervalued.

“The rand has been under tremendous pressure. Although it is always undervalued, it is now more undervalued than previously,” he said.

“A good outcome in the elections can see the rand strengthen to R17.50 or even R17.00 against the US dollar.”

These are the immediate impacts on the financial markets should South Africa’s 2024 general elections yield a positive result.

These impacts will spill over into lower inflation, lower interest rates, more investments, and stronger economic growth.

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