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A South African puzzle

Sandeep Mahajan's picture

In recent months, the external sector in South Africa has strengthened in ways that are somewhat perplexing. The strengthening has partly to do with weak import demand due to the economic slowdown.  But the surprising aspect has been sustained inflows of foreign portfolio investment in South African domestic securities.  Just as the news on the real sector and fiscal balances has gotten worse, somewhat paradoxically foreign investors’ appetite for South African securities has grown. Negative reports on economic performance have been unrelenting -- recession and higher unemployment, biggest declines on record in manufacturing and mining, battering of the automobile industry, and a much-larger-than-anticipated fiscal gap.  Yet, the Rand stood at a 10-month high against the US dollar on June 30, whereas currencies in Brazil, India and Russia had lost much more ground against the greenback. The country issued a 10-year, US$1.5 billion bond on international markets in May, and it was oversubscribed several times over at a modest spread of 368 bp over LIBOR.  By end-June, foreigners had net purchased about US$4.5 billion of bonds and stocks on South African markets.

No doubt, foreigners are attracted by the country's good record on macroeconomic stability, financial sector discipline, and rapidly rising investment in infrastructure, although they may be deterred by its large current account deficit.  But that record has not changed in recent months. So what explains this seeming dichotomy between progressively bad news on economic performance and strengthening interest of foreign portfolio investors?  A penny (or 8 South African cents, which would have been 10 cents in April) for your thoughts.

Comments

Submitted by afro_elite on
No matter which way you look at it, African development is intrinsically linked to South Africa. Currently South African entrepreneurs are buying up assets and businesses all over Africa. Before the West and all the Afro-pessimists wake up, it might be too late.

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