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Regina Chi is vice-president and portfolio manager of AGF Investments Inc.

In a country of 60 million, only about a million people in South Africa have received at least one dose of COVID-19 vaccine – less than 2% of the population, according to Africa Centre for Disease Control and Prevention. Spurred by a variant of the disease that likely originated there, case counts have been rising again, and recently reached their highest level in four months. In short, South Africa – the second-largest economy in Africa, and among its most developed – is far from putting the COVID-19 pandemic behind it.

Yet one might not be able to infer that from the performance of its stock market. In fact, despite recent weakness because of lower commodity prices and a stronger U.S. dollar of late, it is one of the best-performing Emerging Markets (EM) in the world this year, with the MSCI South Africa Index climbing around 10% year to date, according to Bloomberg data.

That is even more remarkable given that the country was once considered one of the “Fragile Five,” a term coined by Morgan Stanley in 2013, during the original “taper tantrum,” to describe economies reliant on foreign capital and therefore highly susceptible to higher interest rates. But not this year: the South African stock market has outperformed other EMs despite increasing global bond yields. Perhaps even more counterintuitively in a rising rate environment, the rand has been strong, appreciating a bit more than 2% against the U.S. dollar so far this year, Bloomberg also shows.

Why the change? In part – and it is a big part – South Africa has benefited from resurgent commodity prices, especially for metals, and mining comprises nearly 10% of the country’s gross domestic product, according to the Organization of Economic Co-Operation and Development (OECD). In turn, this has given lift to names like Anglo American plc, the U.K. listed mining multinational with headquarters in Johannesburg, yet the market outperformance this year might also have to do with less cyclical factors. Among them, South Africa under President Cyril Ramaphosa has promised a wide-ranging program of economic reforms. His government’s Economic Reconstruction and Recovery Plan is an ambitious program, in our view, and while the history of reform promises in Emerging Markets is spotty to say the least, there are reasons for optimism in South Africa’s case. One of them is Ramaphosa’s campaign to crack down on political corruption – a problem that has long complicated the country’s political landscape and its reputation among investors, despite promises from successive governments to tackle it. But this time, there are signs that Ramaphosa really means it.

The Ramaphosa reform program includes strategies to create jobs, reduce reliance on food imports, revive the domestic auto industry, expand power generation and renewable energy, and return the beleaguered state-owned public utility Eskom to financial and operational health. Achieving all that will be a tall order, but at least the government is operating from a position of relative strength in terms of its external position – often a good guide to medium-term asset market behaviour. According to Bloomberg, the country ran a substantial current account surplus of 5.9% of GDP in the third quarter of 2020 and 3.7% of GDP in Q4, due to a combination of domestic demand restraint and positive terms of trade created by rising metal prices. Despite the decline in GDP through last year, the core economy has been more resilient than expected, with GDP rising in the third (+13.7%) and fourth (+1.5%) quarters, Statistics South Africa shows. At 3.3%, inflation in 2020 was at its lowest rate in more than 15 years. And while employment remains a significant challenge – the official jobless rate for Q1 came in at 32.6 – average salaries have returned to pre-pandemic levels. If the global commodities rally endures, high metal prices could continue to support the economy.

Recent political developments have been strongly positive, including mounting evidence of success for Ramaphosa’s tough stance on corruption. A case in point is the legal and political imbroglio of Ace Magashule, the recently suspended secretary general of the African National Congress (ANC). A powerful figure in South Africa, Magashule effectively shares control over the ANC with Ramaphosa, but according to Bloomberg, he, along with 15 co-accused, now faces 74 charges of corruption, fraud, theft and money laundering.

The charges put Magashule on the wrong side of a hallmark of Ramaphosa’s anti-corruption campaign: the so-called “step-aside” rule, whereby any government member charged with corruption or other serious criminal offences must leave their post within 30 days or risk suspension. Magashule, who denies any wrongdoing, refused to step aside – and Ramaphosa promptly suspended him from his ANC post. This has been widely seen as a victory for Ramaphosa, and it could have significant political ramifications ahead of local government elections later this year. For global investors, it suggests that anti-corruption promises in South Africa actually may have teeth – and their application against such a powerful figure as Magashule could help Ramaphosa solidify control of the government as he embarks on further reforms.

One of those is the proposed restructuring of Eskom, the state-owned utility that provides South Africa with 90% of its electricity. Saddled with declining facilities and in dire need of capital injection, Eskom is a perennial money-loser that has amassed tens of billions of dollars in net debt, and the lack of reliable electrical supply remains a pain point for the South African economy. In 2019, Ramaphosa proposed splitting Eskom’s transmission, generation and distribution units into three separate companies, in part to encourage competition and in part to smooth Eskom’s access to capital markets. The process has been slow and halting, but Eskom – which now has a professional management team – says it is now on track to spin off its transmission unit by the end of 2021, with the generation and distribution businesses to follow in 2022.

Of course, especially in Emerging Markets, promises of reform tend to come and go – and often with little concrete impact. That reality should rightly make investors hesitant to proclaim “it’s different this time,” but healthy skepticism should not be immune to the evidence. Other countries, such as India and Brazil, have managed productive economic reforms in recent years; while there are no guarantees, South Africa might be the next to do so. At the very least, the signs so far suggest that Ramaphosa may be building a foundation to create meaningful change in a country that desperately needs to be managed better.

AGF owns stock in Anglo American plc.

The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations.

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