Reasons to be worried… and cheerful about South Africa

Along with Brazil, South Africa was only a few years ago hailed as an emerging market success story, with a relatively stable political and economic landscape. But there has been a sudden reversal of fortune for the two countries, according to Hermes Investment Management.

"Investors used to love it," said Elena Tedesco, emerging markets director at Hermes, about South Africa.

"Investors used to think that it's a country that is growing, where the middle class is emerging, where politics was relatively stable. Now things have changed a lot, growth is declining- this year it could be below 1 percent, and we're talking about a lot of corruption."

Holding parallels to the corruption scandal emerging out of Brazil, corruption allegations against South African president Jacob Zuma came to light last week after he was accused of using public funds to renovate his private country estate. Zuma has apologized for the use of the public resources but is refusing to reimburse some of the funds; the South African parliament this week is debating the motion to impeach Zuma.


The turmoil in the South African parliament is also being felt in the broader economy, with GDP growth of 0.6 percent in the fourth quarter of 2015 and unemployment at 24.5 percent, according to government statistics.

"The emerging middle class story is slowing down. There used to be a much stronger job formation… the consumer space used to be the place to go to in South Africa but now things are slightly worse," Tedseco told CNBC on Tuesday.

Although there are a lot of concerns in investing South Africa including the decline in mineral metal prices, power problems, issues about strikes, poor education levels, Tedesco believes that "bottom up it's still possible to find good companies in South Africa with good management and companies that can grow earnings even though GDP is not growing much."


Best and worst case scenarios

Looking ahead at South Africa's future, Tedesco outlined the best- and worst-case scenarios for South Africa:

A pessimistic scenario would look like a "credit-downgrade. There is a review by Standard & Poors in June, chances of a credit downgrade are reasonable," said Tedesco.

"Also, this political uncertainty continuing for more than one year… the end of the Zuma mandate is 2019, so there could be a longtime still of political uncertainty where things don't change."

The better scenario, Tedesco told CNBC, would be one where, "other forces within the ANC emerge and there is a change, basically."

Tedesco advised that companies who could still deliver growth in South Africa are the ones in the healthcare sector, as well as the insurance space and pharmaceuticals.


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