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Ok. Got itSouth Africa continues to progress after the reopening of the economy, even as Coronavirus statistics increase and hospitals rapidly fill up. Read more in our latest market review.
South Africa continues to progress the reopening of the economy, even as coronavirus statistics increase and hospitals rapidly fill up. The full impact of the lockdown will only be seen in activity numbers for the second quarter, but the first quarter GDP contraction of -2,0% already includes signs of decreased mobility, activity and a change in spending. The third consecutive quarterly contraction, however, confirms a weak economic backdrop before the health crisis, weighed down by the heavy burden of load-shedding.
The Supplementary Budget detailed a revenue shortfall in excess of R300bn, R3bn in support for the Land Bank and ballooning debt service costs, which would result in an expected budget deficit of -14,6%. Large-scale reprioritisation of expenditure and the introduction of zero-based budgeting signalled belt tightening, but it was fiscal consolidation that took centre stage. Finance minister Tito Mboweni spent some time unpacking the fiscal reckoning that was looming in the absence of an active approach to the country’s debt problem. Never short of a plan, a poor track record of execution on reforms and difficult fiscal choices, left credit ratings agencies Fitch and Moody’s sceptical of South Africa’s consolidation plans. Local bond markets weakened, with the All Bond Index declining -1,1% in May.
The rebound in equity markets continued with the FTSE/JSE All Share gaining +7,7% over the month. Sharing the dramatic but uneven turnaround of global markets, the FTSE All Share gained +23,2% over the quarter with the most noteworthy moves from Sasol (+258%), which rerated alongside the oil price and gold miners (+68%). Business stress (and/or pre-emptive moves while investors still have capital) has led to a growing number of companies opting to raise capital in the equity market through rights issues, including Foschini, Curro, City Lodge and Sun International.
As is common in periods of crisis, however, low prices and signs of duress also offer opportunity for further corporate activity and an exit strategy for investors. Sun International gained +102% over the month on the news of an offer from a
Chilean investment company (also its Latin American partner) seeking to buy 50,1% of the company. The SA property sector also gained +13,4% over June, as footfall improves with the easing of lockdowns and rock-bottom prices increase interest in takeover targets. The vulnerability created by high levels of debt and debt service costs is heightened during times of crisis. Those with excessive balance sheets would do well to also consider minister Mboweni’s narrow gate.