Following a regime change that was expected to be positive for South African financial markets, the iShares MSCI South Africa ETF (NYSEArca: EZA) is lower by nearly 18% year-to-date, making it one of the worst-performing single-country emerging markets ETFs.
Previously, investors expected President Cyril Ramaphosa, who replaced the controversial Jacob Zuma, to be positive for the country’s financial markets. Some analysts and market observers believe the departure of the controversial Zuma will reduce risk for South Africa’s economy and related financial assets, but that has not been the case this year.
Fitch Ratings recently affirmed a BB+ sovereign debt rating on South Africa with a stable outlook.
“South Africa’s ratings are weighed down by low trend growth, sizeable government debt and contingent liabilities and the highest inequality in the world, which raises policy risks,” said the ratings agency. “These weaknesses are balanced by a favourable government debt structure, deep local capital markets, a healthy banking sector and strong institutions. The affirmation and Stable Outlook takes into consideration signs of recovering governance standards and the prospect of a mild cyclical recovery but also indications that financial challenges at key state-owned enterprises (SOEs) remain substantial and the fact that government debt has yet to stabilise.”
Discouraging Data for South Africa
Although Ramaphosa is still viewed as a better alternative to the departed Zuma, the new president has some tough economic data points to deal with.
“The continued exceptionally high inequality and high unemployment (27.5% at end-2017) could raise long-term pressures for measures that might harm fiscal sustainability or growth prospects,” according to Fitch. “However, despite serious challenges over the last years, South Africa’s institutions, including the judiciary, SARB and the National Treasury, have shown significant resilience.”
Earlier this year, S&P applied a stable rating to South Africa, not a negative rating, although that ratings agency has a junk rating on the country. Additionally, the country is expected to post solid GDP growth this year.
“The current account deficit narrowed to 2.5% of GDP in 2017 but Fitch expects it to widen moderately, to 3.6% of GDP in 2019, on the back of stronger domestic demand. South Africa will be exposed to a tightening in global financing conditions given that more than 40% of domestic bonds are held by non-residents and that the current account deficit is mainly financed by portfolio inflows,” according to Fitch.
For more information on the South African markets, visit our South Africa category.