Improving fixed investment is going to be key to any longer-term improvement in South African growth prospects. The dearth of private sector investment since 2013 explains a great deal of the decline in the country’s potential growth rate in recent years. This has been compounded by the virtual halt in investment spending by state-owned enterprises in the last three years, as stretched balance sheets and deteriorating access to debt markets constrained them.
Surprisingly enough, this is not just thanks to some bizarre quirk of the data. And it should have a bit of momentum. Wilson Bayley-Holmes , one of the two remaining sizeable construction companies in South Africa, has seen its share price jump by over 30% in the last ten days. This was from a very depressed price. It also followed a strong improvement in the Australian operations after a once-off write-off last year.
These are all small pieces of good news. It doesn’t take away from the damage done by years of inactivity in infrastructure spending. The key is that the incremental improvement continues. For that to occur, continued operational turnaround is needed at the key state-owned enterprises – notably Eskom, SANRAL, Transnet and ACSA.
The spread between South Africa’s government bond yield and the JP Morgan Emerging Market local currency index is currently at 325 basis points. This has rallied marginally in the last month, but remains more than twice as high as the pre-December 2015 average levels of 150 basis points. South Africa’s 5-year credit default swap rate is 167 basis points. Brazil’s comparable rate is 125 basis points.