South Africa's economy is struggling to make progress as foreign investment wanes and the government...
South Africa's economy is struggling to make progress as foreign investment wanes and the government tries to tackle education and crime.
Jonathan Asante, a fund manager on Framlington's Emerging Markets desk, says South Africa faces a number of problems, the first being nobody seems willing to fund its growth.
The economy appears to be having trouble growing because of a skills and capital-drain that is seeing all the country's talent emigrate. At the same time foreign direct investment is low over concerns about the country's ability to provide a stable, skilled workforce.
According to Asante, the ANC government is running its accounts to a first class order and budget deficit is not a problem but the country still suffers from budget mismanagement.
He says: "An example is in education, where the government decided the sector was overstaffed and offered payoffs to teachers. The problem was all the best ones knew they could get work in the private sector."
One of South Africa's pressing problems is to get people into schools to generate an educated labour force. He says: "The majority of the workforce spent their lives fighting for freedom and being deliberately under-educated, which means they are not a particularly skilled source of labour."
Asante says question marks remain over whether the government can bring interest rates down further. Inflation has remained stubbornly high at around 7% with the government's target at 6%.
John McNab, chief investment officer of Investec's South Africa operation, says the picture is not as bleak as people often assume. He concedes there will always be an attraction from developed markets for highly skilled professionals but does not think South Africa differs from other emerging market economies such as India.
McNab says the resource-based economy is less attractive and draws less investment than expected for an economy with a service bias. Some 30% of the country's economy is resource-based, although this is down from around 80% in the 1970s and 60% at the beginning of last decade.
Financial services account for 25% of the market, the consumer sector makes up 17%, industrials 7% and technology has risen from less than 2% in 1990 to 12%.
McNab believes South Africa needs to develop its manufacturing and service sectors but points out that several South African companies are in the FTSE 100, leading him to believe they will help bring the country prosperity as they raise more capital offshore and extend their global footprint.
The top 20 companies in South Africa account for 65% of the index with Anglo American, De Beers and Old Mutual prominent weightings.
McNab says he is bullish on South Africa and believes the economy will pick up to around 3% growth this year and prosperity will expand into the broader economy. He says: "We like South African bonds and we like the equities even more because, as bond yields come down, the valuations on equities will increase, reflecting a rising GDP and lowering inflation."
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