Interview with Lameez Omarjee – Fin24
Johannesburg- The damage of the credit downgrade extends beyond foreign direct investment inflows and will also impact potential mergers and acquisitions going forward.
Kevin Cron, head of corporate mergers and acquisitions at Norton Rose Fulbright, explained to Fin24 that this may be because foreign investors are likely to be more cautious now that the country is rated at sub-investment grade.
Ratings agencies Standard & Poor’s (S&P) and Fitch downgraded South Africa’s sovereign rating to junk following the Cabinet reshuffle, which saw President Jacob Zuma replacing former finance minister Pravin Gordhan with former home affairs Minister Malusi Gigaba.
Following the reshuffle BMI Research, part of the Fitch Group Company, looked at the impact on the economic outlook. Among the concerns raised was the consequence for investment.
The research showed that less investor-friendly regulation such as the Mining Charter Amendment and the proposed Expropriation Bill would be negative.
Cron told Fin24 that the downgrade would likely cause fewer transactions than there would have been. “Crossborder M&A as far as investing in South Africa is concerned, is likely to be depressed.”
However, Cron said there are opportunities that could still arise. Investors with a “bigger risk appetite” and who take a medium to long term view might see an opportunity to get assets in South Africa, more cheaply.
“Domestically we may see more activity emanating from South African companies due to domestic factors like new BEE requirements coming out of the revised mining charter.” He added that South African companies are looking to “spread risk” by investing overseas. This is a reverse of inward investment. Overall, Cron said M&A activity would likely slow down and this will be negative.
Over the past few years M&A activity has been “fairly flat” explained Cron. A number of divestments have taken place over a number of reasons and are not necessarily linked to politics. In the mining sector, this was mainly a feature of resource prices and the economic difficulties these resource-focused countries are facing, he explained.
Further these divestments are not being balanced with an equivalent inflow of investment, and figures are not what they should be, he added.
Data from the South African Reserve Bank’s (SARB) quarterly bulletin for the last quarter of 2016 shows the country’s international investment position. The net inflow of capital in the financial account of the Balance of Payments came to R5.6bn.
The United Nations Conference on Trade and Development (Unctad) also revealed that foreign direct investment inflows in 2016 were relatively low at $2.4bn.
Cron explained that policy certainty is something investors consider. “For us to be attractive, we must have a degree of policy certainty,” he said.
Lindi Gillespie, chief executive of investment and brokerage firm, Atlas Africa, explained that a driving factor behind investors’ decision to choose a country is governance.
“Countries of focus include Namibia, Ivory Coast, Malawi. Countries of good governance, that is where the money is going,” she said.
Gillespie added that South African businesses are diversifying into other parts of Africa, like the east and the west.