SA must quadruple economic growth
Poor govt finances
South Africa's economy grew only 0.6% in 2023, leaving almost 8 million people unemployed, compared to about 4.8 million in 2013.
Garth TheunissenUnless South Africa’s economy grows almost four times faster than it currently is, its government will be unable to escape the fiscal hole it has dug for itself.
That’s the view of Coronation Fund Managers portfolio manager Charles de Kock, who spoke at the Investment Forum 2024 in Sandton, Johannesburg on Tuesday.
De Kock said government’s poor finances are why the Coronation Balanced Fund has only a 13% allocation to South African bonds, with about half of that allocated to corporate debt.
“The SA government’s fiscal affairs are in dreadful shape and unless we can growth the economy at least 2% - and that is the minimum, it should be more than that, or you curb government spending meaningfully – they’re not going to get out of this hole,” De Kock said during a panel discussion.
“You are getting a reasonable yield, which I think is okay compensation for the risk you are taking, but it’s only okay. I don’t think it’s a big dripping roast at all.”
GDP
South Africa’s economy grew only 0.6% in 2023, leaving almost 8 million people unemployed compared to about 4.8 million in 2013.
Treasury estimates that the consolidated budget deficit for the 2023/24 fiscal year will be 4.9% of GDP and is forecast to narrow only slightly to 4.5% of GDP in 2024/25, before easing to 3.3% by 2026/27.
More worrying is government’s gross loan debt as a percentage of GDP, which at about 74% is the highest since 1947 and way about the 60% level that many economists believe should be the maximum for a developing country. Government is also spending one out every five rands it earns from tax on repaying its enormous debt obligations.
That’s why the Coronation balanced fund has a 10% allocation to global bonds, which have the benefit of paying investors a fixed income in hard currency.
Similarly, the Cape Town-headquartered fund manager has a 36% allocation to offshore equities in its balanced fund though SA equity still gets a 37% exposure but favouring stocks that earn significant revenue outside of SA.
“Our portfolio will cope better in a weak rand environment,” said De Kock. “If the rand is very strong and South African economy grows at 4% our mix isn’t right, but I just don’t see that happening unfortunately.”
Investments instruments
De Kock also bemoaned the lack of liquid investment instruments with exposure to infrastructure, saying asset managers are constrained in investing in such assets as they are typically thinly traded, even when listed, which makes price discovery very difficult.
Recent changes to Regulation 28 of the Pension Funds Act, which govern asset allocation limits for asset managers, have made it easier for fund managers to allocate money to infrastructure-related projects, though they are still constrained by the fact that nongovernment debt instruments tend to be thinly traded in South Africa, making it harder for asset managers to confidently allocate investor capital to such investments.
“There is no doubt that South Africa needs infrastructure investment in spades. We are absolutely ready and willing to commit big money to that on behalf of our clients depending on the potential return. [But] it’s not readily available in liquid form.
“Our limited access to infrastructure at this stage is not due to us not seeing it as a major need, it’s the instruments available to us. The same applies to private equity – we have clients with 24-hour mandates who can take their money away so if you don’t have price discovery on the asset it’s really difficult for us to give the money back to the client at the right price.”
Tricky
Sandile Malinga, a portfolio manager at M&G Investments, echoed the thoughts of De Kock, saying the lack of liquidity in instruments exposed to infrastructure investment, such as listed bonds, made marking such assets to market tricky.
“I think it’s really important because what is the true price, and what is the price on the screen,” Malinga asked rhetorically during the same panel discussion.
“As we’ve seen recently with South African corporate debt, a lot of it doesn’t price so...the overwhelming majority of non-government bonds on the JSE actually don’t price. Because it’s not being price daily, it’s not something we can participate in.”
– Fin24