Seaside full of small boats

30 Mar 2023

Thematic view – how a rising export tide can lift all boats

Osagyefo Mazwai

Osagyefo Mazwai | Investment strategist, Investec Wealth & Investment

What would be the economic impact if South Africa were to see an improvement in exports? We look at the scenarios.


South Africa is facing a range of simultaneous economic challenges. In particular, Eskom and Transnet remain constraints on South Africa’s growth outlook. Listed companies continue to flag how power rationing and logistics constraints impact both their top line (revenues) and bottom line (net profit), highlighting how these challenges impact production and thus volumes as well as operating costs. In the current inflationary environment, these are net negatives as producers continue to attempt to push rising costs onto the consumer. In this thematic article, we unpack the relative impact that improvements to these structural constraints could have on a selected pool of economic variables including exports, GDP growth, employment and household final consumption expenditure – as well as the overall implications for equity markets.

Our first illustration of the relative performance of South Africa export volumes, given its structural problems, relative to emerging market peers, as represented by Brazil, China and India (Chart 1 below). South Africa has underperformed its emerging market peers since 2000, and the slow pace of export volume growth capacitation has been particularly pronounced since 2011. Brazil, the next laggard in the series, is nevertheless outperforming South Africa by about 20%.

Chart 1: Emerging markets export volume growth

emerging market export value index chart

Date sampled: 28-Mar-23
Source: Investec Wealth & Investment, World Bank

Perhaps the most disappointing aspect of our poor export volume growth is captured in chart 2 below. South Africa has outperformed emerging market peers in terms of export unit value growth, that is, the pricing of our export basket has been favourable in comparison with emerging market peers. That indicates that our export commodity basket, or the mix of goods that we export, has benefited from price appreciation relative to other emerging markets. This basket has consistently outperformed emerging market peers since the year 2000. The key point is that, when we unpack export revenues for South Africa, which is a function of price multiplied by volume, South Africa ticks the correct boxes when it comes to price (a function of the export basket) but doesn’t when it comes to volume.

Chart 2: Emerging market export values growth

Emerging market export unit value index chart

Date smpled: 28-Mar-23
Source: Investec Wealth & Investment, World Bank

Our  inhouse view is that the US dollar will depreciate this year. At the same time, Bloomberg consensus estimates global GDP growth of between 2% and 3% for 2023. We modelled this scenario and what its relative impact is likely to be on South African export basket prices. The results indicate that, in this scenario, our export prices would appreciate by between 14% and 25%. All other variables being constant, this would be a net positive for South Africa, and in particular for our exporters (agriculture and mining) and nominal GDP. Nominal GDP is important for South Africa’s fiscal outlook since it affects both tax revenues and the debt-to-GDP trajectory.

Chart 3: South Africa export pricing scenarios

South Africa export unit price growth model table

Date: 28-Mar-23
Source: Investec Wealth & Investment, World Bank, Bloomberg

What about export volumes? We next looked at what the relative impact would be if our exports performed more or less in line with Brazil (i.e. SA exports up 20%) on GDP growth, employment and household final consumption expenditure.

The first point is that export volume growth is positively correlated with GDP growth. Chart 4 below shows that higher export volume growth is, as expected, positively correlated with higher GDP growth. If South Africa had performed more or less in line with Brazil, we would expect GDP growth to be about 7% higher. This is materially above the current GDP growth trajectory for South Africa, which points to expectations of between 0% and 2% growth over each of the next two years. An improvement in the situation when it comes to our structural problems, which are currently impediments to export growth, would have a substantial positive impact on GDP growth.

Chart 4: Exports and GDP growth

Change in exports versus GDP growth chart

Date sampled: 28-Mar-23
Source: Investec Wealth & Investment, World Bank

The second point that charts 5 and 6 below show is that GDP growth is correlated with improved employment outcomes one year later. It similarly shows that the only meaningful level of GDP growth that has an impact on unemployment alleviation is GDP growth when it is above 2%. We have already illustrated that a 20% boost to export volumes would result in GDP being 7% higher, materially above what is required for improved employment. According to StatsSA, the unemployment rate for South Africa was 32.7% in the fourth quarter of last year. If we were to fix our structural problems over the next two years, it would lead to an extra 7% growth over the period,  or 3.5% extra each year and we would expect the unemployment rate to fall by around 3%. In this environment, total employment would rise by around 3% too. An improvement in GDP would have a material impact on employment in South Africa, but only if GDP growth is above 2%. Improving our export volumes would therefore positively impact employment dynamics in South Africa. .

Charts 5 and 6: GDP growth and employment

Charts showing the change in unemployment and employment

Date sampled: 28-Mar-23
Source: Investec Wealth & Investment, World Bank

Our final point, illustrated by Chart 7 below, shows the relative impact of improved employment on household final consumption expenditure. Employment growth of around 3% is associated with household final consumption expenditure growth of around 3% too. This is an important point, given the relative impact of improved consumption expenditure on equity markets broadly. The consumer and consumption are central to economic activity, as well as for broad-based equity market performance; and for investors, consumption trends are important from an asset allocation perspective. Improved consumption expenditure is a net positive for company-specific performance (from a demand perspective) and thus equity market performance.

Chart 7: Employment and consumption expenditure

Employment and consumption expenditure chart

Date sampled: 28-Mar-23
Source: Investec Wealth & Investment, World Bank

So what would this hypothetical scenario mean for equity markets? The phrase “a rising tide lifts all boats” comes to mind. Like social grants, more money in the form of higher consumption expenditure from the pockets of consumers, is a net positive for companies across many sectors, in particular SA Inc stocks like retailers (expenditure) and banks (deposits, credit extension, collections). Improved earnings, earnings quality and earnings outlooks for SA Inc bode well for the JSE All Share when it comes to broad-based potential reratings. Our net exporting industries will also benefit from an improvement in our export capacity, namely agriculture and mining. South Africa currently screens as cheap when compared to other equity markets from a valuation perspective. Our base case catalyst for this hypothetical uplift is improved performance by Eskom and Transnet. Energy security is a central pillar of economic activity, and logistics is central to the movement and flow of goods and services. The knock-on effect of an improvement in the performance of Eskom and Transnet would be a net positive for a wide array of economic variables and metrics.

In summary, improved exports will result in a material improvement in GDP growth, which in turn will lead to better employment outcomes and ultimately higher household final consumption expenditure. This is a net positive for equities as incomes and thus demand is enhanced, positively impacting earnings.

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