The cupboard is now bare

It is difficult to remember the heady days of the 2010 Soccer World Cup and the general sense of national euphoria and ‘gees’ we experienced. Business development manager Nick Curtin writes how the national mood is very different as we limp into 2021. 

South Africa’s economic growth was solidly mid-single digits in the years before the 2008/2009 Global Financial Crisis (GFC). Significant investment in economic infrastructure had generated employment and expanded the long-term growth potential of the economy. With government debt amounting to just 25% of national GDP in 2008, the public finances were sufficiently robust to endure the GFC’s heavy toll. The nation borrowed to spend its way out of that crisis, as did most countries across the world.

But the lost decade that followed saw gross mismanagement of the economy. Phrases like ‘state capture,’ ‘cadre deployment’ and ‘radical economic transformation’ became all too familiar. Growth steadily declined as crisis after crisis retarded the economy’s capacity to grow faster than its population growth. South Africans have become poorer and poorer on average, especially in US dollars.

We cannot blame the government for the 2020 COVID-19 pandemic, but we can blame it for the parlous state of the public purse and national health infrastructure. National Treasury estimates the economy to have shrunk by at least 5% last year. Its (optimistic) forecast is for the economy to recover to 2019 levels only by the end of 2024. There goes another lost half-decade.

Compounding the debt problem is that too much of the national borrowing over the last decade has gone to consumption and not enough to fixed investment. For example, per capita public servant salaries increased 206% over the last 13 years—that’s 9.0% per annum when inflation was below 6.0% per annum. The average annual salary of the 1.3 million government employees today is a staggering R415,000. 

The government borrowed extensively in 2020 to support employees and industries affected by the excessively austere national lockdown. But as Old Mother Hubbard discovered, the cupboard is now bare. The national debt is (again, optimistically) forecast to spiral to 95% of GDP before moderating. Short of astronomical economic growth, only very aggressive spending cuts can now arrest the debt trap. And spending cuts will cause further economic contraction.

But it’s not all doom and gloom. Being discounting machines, the financial markets have already priced most of these harsh realities into ‘SA Inc.’ securities. Valuations of many quality South African-focused companies have fallen to very attractive levels. We expect solid inflation-beating returns from these investments in the years ahead, despite the difficult economic environment. Near-term government bonds still offer attractively high yields given anaemic inflation and low risk of default. The SA listed property sector has halved in the past three years, affording some select niche opportunities in this troubled sector.

Given the tough SA outlook, the Foord funds maintain their bias toward international investments—yet the fund managers are increasingly finding opportunities in quality assets across the South African investment landscape. The portfolios now already include some such gems.