The major risk for South Africa is that investment inflows and the rand could be negatively affected if general sentiment towards emerging markets deteriorates. Historically, rising global geopolitical tensions have generally been negative for the rand. After a brilliant start, the BRICS grouping (Brazil, Russia, India, China and South Africa) is now home to a number of countries with dark international reputations that could rub off on South Africa by association.
An analysis of mergers and acquisitions (M&A) activity before and after the downgrades in several other countries such as South Africa itself, as well as Brazil and Greece, suggests that while foreign investment will not cease not, investors will over time adapt their investment portfolios to align with the parameters of their investment mandates.
Sanctions imposed on Russia could continue to fuel our commodity boom, which could have a positive impact on mining services and mergers and acquisitions among other industries that serve mining industries.
A study of such economies as that of South Africa – which includes commodity-dependent Russia – before and after a credit downgrade suggests that catastrophic capital flight is unlikely even if investment patterns between countries are different. When opportunities abound and returns remain strong, there is a direct correlation between risk and reward.
South Africa has a rather unique investment profile as an entry point to the continent and as a destination for investments in medium to low risk developing markets. This is unlikely to be affected by Russia’s downgrade, another factor being that throughout recent upheavals, including the pandemic, the rand has been much more resilient than most had expected.
On the contrary, it is possible that the sharp rise in interest rates in Russia – caused by the sanctions rather than the downgrade – could redirect some investments from emerging markets to South Africa rather than to Russia. After the downgrade, Russia and Brazil experienced a sharp rise in their cost of capital, especially private financing and risky investments. South Africa did not have this experience to any marked degree after our demotion, so it is very unlikely that we will encounter such turmoil when demoting another country.
However, South Africa would not benefit from fund managers or pension funds redirecting portfolio investment into South African bonds, as South Africa itself is below investment grade.
I would recommend any South African company involved with Russian counterparts to exercise increased due diligence in monitoring supply chains, imports and exports.
Andrew Bahlmann, Managing Director, Business Consulting, Deal Leaders International