Picture: REUTERS
Picture: REUTERS

Markets have a way of puncturing complacency. Friday’s rout in the rand should have punctured any illusions of South Africans that the post-December investor confidence surge was enough to revive SA’s economic fortunes.

Argentina and Turkey have been savaged recently as a strong dollar and rising US rates and trade war risks have cut global investors’ risk appetite and turned the tide of investor sentiment against emerging markets. SA had been congratulating itself that it had solid policies and sound financial markets and was not Argentina, Turkey or even Brazil.

But last week it was SA’s turn. The rand on Friday pierced R13 to the dollar, dropping at one stage by more than 2% to almost R13.30, its worst level since December’s ANC conference. For the week it was down almost 4% against the dollar, making it the fourth worst performer among emerging market currencies. It has fallen 11% since its Ramaphoria peaks in the first two months of this year. Benchmark bond yields, too, have spiked back to levels last seen before the December conference.

The horrible first-quarter GDP figures clearly haven’t helped. The shock 2.2% contraction was a reality check of how dysfunctional SA’s economy is and how much work needs to be done, and how many tough decisions have to be made to get growth to levels that will cut unemployment and improve quality of life.

The rand on Friday pierced R13 to the dollar, dropping at one stage by more than 2% to almost R13.30, its worst level since December’s ANC conference

But the currency crash is also a reminder that SA’s twin deficits — on the balance of payments and public finances — still make it highly vulnerable to global market fortunes.

The deficit on the current account of the balance of payments was 2.5% in 2017. That is well down on its peak of 5.8% in 2013, when SA was, not surprisingly, one of the emerging markets hardest hit by the global taper tantrum. But the current account deficit is expected to rise this year. The jump in global oil prices is not good for SA’s terms of trade, making our key import more expensive, while first-quarter GDP figures showed a plunge in exports, which doesn’t bode well for the year.

SA’s current account deficit and its fiscal deficit are simply reflections of its habit of spending more than it earns. As long as SA still needs to borrow on international markets to fund its spending habit, it will remain vulnerable to fickle global investor sentiment. And though the government, wisely, has not relied too heavily on dollar debt, which is under 10% of total government debt, foreigners have financed much of the government’s increase in borrowing in recent years and now own more than 50% of those benchmark rand-denominated government bonds. That means any turn in sentiment risks capital outflows from the bond market, which is what has been happening over the past month or two.

Ideally, the foreign money coming into SA would have been in the form of more durable direct investment, in new projects or in existing companies. But foreign direct investment has declined over the past few years, just as domestic fixed investment spending has done, because of SA’s weak growth performance and high policy and political uncertainty.

President Cyril Ramaphosa has set encouragingly ambitious targets to generate $100bn in new fixed investment, by local and foreign investments, over the next five years. Despite his investor-friendly rhetoric, most recently at the weekend’s Group of Seven gathering, this is not yet an environment in which it is easy to do business, much less one that provides the policy certainty or policy consistency that companies need if they are to commit to large and long-term new job-creating investment projects.

Ramaphosa has made crucial moves to clean up key institutions, but there is much work still to do to make it attractive for the private sector to invest in real assets, not just financial assets, and boost the economy’s ability to generate jobs and exports.

Markets are fickle. The rand and emerging markets could bounce back. But without fundamental reforms to the economy, SA will remain vulnerable.