SA: The road is long

The question I was asking myself, is whether there are metrics that can be used to measure when, and if, the country had turned a corner. Ray Dalio is a philanthropist, hedge fund manager, and investor with American citizenship. He established Bridgewater Associates, one of the largest and most prosperous hedge funds globally. In addition to his career as a hedge fund manager, he is also an accomplished author. His book, "Principles for Dealing with the Changing World Order," has gained widespread popularity and is considered a best-seller. In this book, he describes his automated approach to analysing the factors contributing to improving or deteriorating a country's conditions.

Before diving into these in detail though, it is worth remembering that even in unfavourable conditions, there are companies that can and do excel. After more than a decade of a tough, low growth local environment, these companies continue to deliver credible performances in the face of very difficult conditions. Now, imagine what would happen if the conditions were to actually become supportive of their businesses – and you can see why watching for signs of improvement in these ‘flags’ are so important to me as a long-term investor.

In addition, if we understand the factors foreign investors consider when making investment decisions, and take that into consideration in how we allocate resources nationally, we have an opportunity to make a different by being more targeted and strategic in our approach. In the words of Sun Tzu: “Know yourself and you will win all battles.”

Despite many destabilising events and own goals, the JSE has trended upward

Graph 1: MSCI All Country World Index (in ZAR) vs FTSE/JSE All Share since 1997

Source: Refinitiv Eikon

But back to Dalio. To derive his factors, Dalio inputs data into a computer system, generating a summary report on the current state of affairs and the potential long-term outcomes for each country. In short, he focuses their investments on improving countries and avoids investing in deteriorating countries. His current prognosis is that the country is on a “flat trajectory”, and he sees the key weaknesses of South Africa are “its weak relative position in education, its bad reading on innovation and technology, its relatively weak military, its relatively small economy, its relative unimportance to global trade, its corruption and inconsistent rule of law, and its poor infrastructure and low investment.” (Source: The Changing World Order – Country Power Index 2023 Ray Dalio).

While his criticism seems harsh, his analysis does provide some important flags that investors can watch for to ascertain the attractiveness as any country as an investment destination.

1. Education

He first cites our weak relative position in education as a significant weakness in South Africa. In his report, Dalio points out that SA students complete an average of 9.2 years of schooling, compared to 11.7 years in other major countries. However, what’s more troubling is that school attendance for SA children has been on the decline.

Graph 2: Number of Grade 1’s in South Africa

Source: Departement of Basic Education RSA

According to the annual statistics supplied by the Department of Basic Education RSA, the total number of grade 1 students who began their school career in 2022 is 13% less than in 2015. While we can speculate on the reasons for this (are struggling South Africans who cannot find work actively deciding not to send their children to school to save money?), the fact of the matter is that a sound education is a necessity to compete effectively in the labour market. If we can successfully address this issue, we can, not only make a huge difference to the lives of many individuals, but also to the economic outcomes we are likely to see in our country.

2. Relatively small (or shrinking) economy

The harsh reality is, the SA GDP is not much bigger than four years ago (2018). There are several reasons for this, undoubtedly including the Covid-19 pandemic, which had a global effect. However, I don’t think this is the main reason for the decline. The reality is that countries need energy to grow, and undoubtedly, the Eskom crisis will have an impact on the country’s performance.

This is perhaps one of the most urgent issues we have to resolve to restore our ability to do business as a country. Apart from having an overall positive effect on the retail, manufacturing and mining sectors, which have struggled tremendously because of rolling blackouts, investing in new infrastructure and renewable energy production will lead to the creation of more jobs. Thus, getting our energy house in order can potentially help us to address unemployment, which proves to be another huge South African bugbear.

Graph 3: South African GDP & IMF Forecast

Source: Refinitv Eikon & IMF

3. Corruption and inconsistent rule of law

According to the Global Organised Crime Index (OCIndex), nearly 80% of the world’s population today live in countries with high levels of corruption, of which South Africa ranks 19 out of 193 countries. Poverty and the prevalence of firearms are certainly massive contributors to the problem. While job creation will certainly contribute towards addressing the poverty issue, efforts have been made by the South African government to combat the proliferation of illegal firearms, including through stricter border control measures, increased law enforcement, and public awareness campaigns.

However, the problem remains significant and continues to contribute to high levels of violent crime in the country. Increasing these efforts, especially through resources and personnel for police departments to improve their capacity to investigate and intercept illegal firearms and harsher penalties for illegal possession and trafficking of firearms should make a difference in these figures.

Ironically, South Africa’s greylisting may provide an incentive for Government to put real effort into successfully prosecuting financial crimes. By bringing the guilty to book, we can make significant headway in combating perceptions around corruption and restoring the rule of law.

4. Poor infrastructure

Not unlike the other topics Dalio highlighted, South Africa’s weakening infrastructure is another area that needs improvement. Let’s use Metrorail, SA’s train transport system as an example. With the build-up to the FIFA Soccer World Cup in 2010, we had good foreign support, and this system improved to such an extent that the number of train trips increased from around 500 million trips per year in 2000 to 634 million in 2010. However, the number of Metrorail trips in 2022 dropped to a mere 16.7 million.  

Can this be explained by a decline in the demand for rail travel? I don’t think so. Rather, I think it is because the infrastructure was mismanaged and is no longer able to transport the same number of passengers it could ten years ago. The silver lining is that, if this has been done before, it means we could do it again.  Improving infrastructure, such as the Metrorail system, could also boost tourism and, in turn, the economy.

Graph 6: Metrorail Passenger Trips

Source: PRASA

As Dalio highlights, getting the basics right is crucial to ensuring the attractiveness as an investment destination of any country. We know what the problems are, which is an important first step. But now, we need to find the right people to address these issues, one by one.

I firmly believe that we can improve our investment ‘scorecard’, however dire the problems facing us may seem. Moreover, local businesses will start to grow when we provide them with a functional environment within which to operate, and investors will return when we start seeing progress on these problems. However, this won’t happen without putting in some hard work and a concerted effort to get there.

In the interim, it is worth remembering that for investors, the biggest destroyer of wealth is often not the market risks that are visible and that can be priced for accurately, but rather in emotional responses to market and macro events that lead to poor decision making.