The article below is from our BRIEFINGS newsletter of 15 July 2019
Despite weaknesses in South Africa’s economy, improving business confidence and the promise of structural reforms create the potential for higher economic growth rates going forward, according to Goldman Sachs’ Colin Coleman, the firm’s sub-Saharan Africa head, and Kunal Shah and Ryad Yousuf, who are leading the firm’s market-making expansion into South Africa. We talked with them about the evolving macroeconomic and political landscape in South Africa, as well as the opportunities and challenges for investors.
Colin, you’ve led the firm’s business in South Africa for the last 20 years. Can you explain South Africa’s place in the global investment landscape?
Colin Coleman: To take a step back, it’s important to remember that the African continent represents about 2% of the world’s GDP and 15% of the world’s population. South Africa’s economy — running at just under $400 billion GDP — is relatively small by world’s standards, but its equity and debt markets are deep and liquid, and are a key driver of the continent’s long-term growth potential. For example, the market cap of the JSE, the Johannesburg Stock Exchange, is 2.5 times the country’s GDP at $1 trillion.
In particular, South Africa is home to sophisticated corporations which are ideally placed to play the continent’s “demographic dividend” – or the economic growth potential that can result when the share of the working-age population is larger than the non-working-age share of the population. Indeed, there are large populations across Africa that are underserved in products, goods and services and, as a result, represent a huge opportunity for multinationals and South African companies to sell everything from mobile phones, cement and clothing, to beer and machinery. People are also willing to pay more for services they don’t otherwise have, so this creates a positive margin environment for investors. The combination of all these factors makes South Africa a springboard into potentially interesting growth opportunities.
Goldman Sachs is expanding its presence in South Africa with an application for a new banking license and a revenue-sharing agreement with Investec on equities. Why now?
Kunal Shah: As a firm, we explored the possibility of expanding in South Africa over the years. When we analyzed the move again early last year, we felt like this was a good time to take that step. For one, there was political change in South Africa with Cyril Ramaphosa taking over from Jacob Zuma as president last year. Market participants largely expect Ramaphosa to tackle entrenched corruption and implement structural and economic reforms. If he’s successful, that will open up investment and financial market opportunities for us and our clients. In addition, we now have sufficient scale across our global currencies and emerging markets businesses where it makes sense to expand our trading platform to allow us to offer more core banking products, such as South African fixed income, to our global clients.
Colin Coleman: While we have long offered advisory and capital raising services through our investment banking presence and have also managed money for wealthy families and institutional asset managers, we were limited in what we could offer our local client base in South Africa. A banking license will allow us to become a primary dealer and trade with local corporates, as well as provide services in currencies, interest rates and derivatives.
What makes South Africa an attractive opportunity for foreign investors?
Kunal Shah: At a time when central banks, such as the Federal Reserve, are turning increasingly dovish, South Africa is one of the higher-yielding fixed income markets, which makes it an attractive place for global investors searching for yield. South Africa also has significant trade and direct investment links with China so the recent trade truce at the G20 meetings opens up a window of opportunity for investors.
Ryad Yousuf: Typically, government bonds would be the first asset a foreign investor would consider when looking invest into South Africa. Investors can, of course, buy equities, but they would be exposed to more volatility given the company-specific risks. South Africa is also one of the only emerging market country that has a strong common-law system originating from English law. For foreign investors, having a strong rule of law and legal infrastructure typically addresses one of their top concerns about investing in emerging markets. President Ramaphosa is also making a concerted effort to attract foreign direct investment into the region. Earlier this year, for example, we hosted a client conference where Ramaphosa spoke about the opportunities and growth prospects for investment in South Africa. This was a high-profile event where investors had the opportunity to share their thoughts on their hopes for new government policies. In turn, Mr. Ramaphosa and others in his government who attended the conference had the benefit of speaking directly with investors on his plans for the country.