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Economic Growth outperforms Expectations

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In a time when good news seems hard to come by, the latest gross domestic product (GDP) results of South African economy provide some cautious cheer. The South African economy grew by 1.3% in 2017, exceeding National Treasury’s expectation of 1.0% growth announced during the National Budget Speech in February.

After a wobbly start to 2017, which saw economic activity contract in the first quarter, the economy saw sustained growth for the remainder of the year.

The fourth quarter experienced the highest growth rate of 2017, with the economy expanding by 3.1% quarter-on-quarter (seasonally adjusted and annualized) following an upwardly revised 2.3 percent rise in the previous period and beating market expectations of 1.8 percent.

It is the strongest growth rate in six quarters, mainly due to a robust gain in agriculture, a rebound in internal trade and a faster increase in manufacturing. GDP Growth Rate in South Africa averaged 2.87 percent from 1993 until 2017, reaching an all-time high of 7.60 percent in the fourth quarter of 1994 and a record low of -6.10 percent in the first quarter of 2009.

A bumper maize crop and recovery in other agricultural commodities saw agriculture production rise by 17.7% in 2017 compared with 2016.

The finance and mining industries also contributed positively to GDP growth in 2017. Mining’s growth was spurred on, in part, by increased production of manganese ore, chrome, and iron ore, according to a recent article by Stats SA. Rising demand for minerals used in the production of steel contributed to these increases.

The trade sector was the second largest contributor to economic growth in the fourth quarter, mostly a result of a rise in activities related to retail, wholesale and motor trade.

Despite mining’s increase for the year as a whole, the industry saw a quarter-on-quarter decline in the fourth quarter, largely driven by a fall in the production of gold and platinum group metals (PGMs).

Agriculture made the largest upward contribution to GDP growth, up by 37.5 percent, following a 41.1 percent jump in Q3, mainly due to higher production of animal products. Other positive contributions came from: trade, catering and accommodation (4.8 percent compared to -0.1 percent), namely wholesale, retail and motor trade; manufacturing (4.3 percent compared to 3.7 percent), namely food and beverages, petroleum, chemical products, rubber and plastic products; basic iron and steel, non-ferrous metal products, metal products and machinery.

Also, strong growth was reported for; finance, real estate and business services (2.5 percent compared to 1.9 percent), namely financial intermediation and auxiliary activities; transport, storage and communication (2.8 percent compared to 0.8 percent), namely land freight transportation and communication services; government services (1.4 percent compared to 1.1 percent); and electricity, gas water (3.3 percent compared to -6.1 percent).

On the other hand, contraction were seen for mining (-4.4 percent compared to 6.2 percent), largely due to lower production of gold and platinum group metals; and construction (-1.4 percent compared to -1.2 percent), due to both residential and non-residential buildings.

Year-on-year, the GDP grew 1.5 percent, following an upwardly revised 1.3 percent growth in Q3 and beating forecast of 1.4 percent. It is the highest growth rate since the first quarter of 2015.

Considering full 2017, the GDP advanced 1.3 percent, above 0.6 percent in 2016. A rebound was seen in agriculture, fishing and forestry (17.7 percent compared to -10.2 percent in 2016) and in mining and quarrying (47.6 percent compared to -4.2 percent).

In contrast, contraction was observed in trade, catering and accommodation (-0.6 percent compared to 1.7 percent), manufacturing (-0.2 percent compared to 0.9 percent) and construction (-0.3 percent compared to 1.1 percent).

President Cyril Ramaphosa – President of South Africa

On the political front, Deputy President Cyril Ramaphosa was elected the new president of the ruling African National Congress (ANC) at the much-anticipated ANC National Conference in mid-December, and then became State President on 15 February after Jacob Zuma announced his resignation on television.

The outcome is considered market-friendly, and the rand appreciated notably after the conference. The result prompted economists to revise their economic growth forecasts slightly upwards, as it is believed that positive political change could trigger a much-needed recovery in confidence levels among households, corporates and foreign investors, which will in due time lead to higher spending and renewed interest in investment in South Africa.

Mr. Ramaphosa has already started to take concrete action which has included the replacement of the Board of Directors and CEO at the beleaguered Eskom, and some action from the National Prosecuting Authority’s Asset Forfeiture Unit. This unit, together with the Treasury, is pursuing 17 separate cases of corporate malfeasance by businesses close to Mr Zuma.

The investigations target some $4.2bn in assets. Then his State of the Nation Address, delivered on 16 February, hit all the right notes on plans to streamline government and address problems in SOEs. These and hopefully more to come in terms of credible plans to revive the economy, including structural reforms, clear policy and regulatory direction, further clean-up actions at mismanaged SOEs, addressing corruption and waste in the economy and stemming the tide in terms of fiscal slippage, would go a long way in convincing the ratings agencies that South Africa’s downward spiral could be turned around. If these developments prevent Moody’s Investors Service from downgrading South Africa’s local-currency debt, South African government bonds will remain part of the Citibank World Government Bond Index.

However, we acknowledge that Mr Ramaphosa faces an arduous task in his attempts to clean up the deeply corrupted structures of the ruling party, and to oversee the prosecution of figures linked to the former president.

These networks are deeply rooted, and intertwine with state structures and a governance system in which many corrupt figures are still present, who can be expected to resist and obstruct all attempts to end the practices.

Inflationary pressures eased in the opening months of 2017, consistent with subdued consumer demand, moderating food prices and a strengthening rand. Headline consumer price inflation slowed from a peak of 6.8% y/y in December 2016 to 4.7% y/y in December 2017, averaging 5.3% last year, compared to 6.4% in 2016. We forecast headline CPI inflation to average 4.8% and 5.2% in 2018 and 2019, respectively.

Although the CPI outlook remains favourable and signals that there is indeed scope for further monetary policy loosening (there was a 25 basis point cut in the policy rate in July 2017), the South African Reserve Bank (Sarb) opted to remain conservative by maintaining the repo rate at 6.75% at its previous three meetings (in September, November and January).

It remains clear that the Bank does not view monetary policy as the sole solution to the structural growth constraints in the economy, nor does it believe that a reduction in interest rates will provide a significant stimulus to growth in the current environment of low confidence and political uncertainty.

With South African economic growth having exceeded expectations in 2017, all eyes are now on 2018. National Treasury expects growth of 1.5% in 2018. Only time will tell how the economy will fare compared with this forecast.

 

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South Africa

Tito Mboweni’s Budget for the Tough Times: Planting the seeds of future economic success

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Finance Minister, Tito Mboweni, delivered South Africa’s 2019 Budget on 20 February – against a challenging economic backdrop of 1.5% growth, a deficit forecast valued at 4.5% of GDP in 2019-20, and the ongoing Eskom power crisis. The budget acknowledged the difficult issues facing the South African economy but included a range of measures to help solve them, including numerous changes to the tax regime and the introduction of a carbon fuel tax.

Mboweni took a firm, practical approach in his 2019 statement and signaled that the time has come for decisive action. Striking a hopeful tone, the Finance Minister pointed out that his budget did not include “quick fixes” but was a way to “plant the seeds” of future economic success.

The budget can only be seen as a budget for the tough times. It is a budget that keeps an eye on the elections, without being a spendthrift. Though very little was given away to any one sector, given the constraints, it should be said that there was a lot of common sense in the narration.

The most notable announcement to come out of the budget is the introduction of a “chief reorganization officer” for all state-owned entities (SOEs) seeking a government guarantee. This is common sense. Under business as usual, SOEs have gone on spending without regard for the liabilities they were imposing on the general discus. Leaders of these companies went out and fulfilled political objectives that did not have any relation to South Africa’s reality of economic struggle and difficulties.

Eskom’s decadence is especially galling and risky for the discus, given the rate at which the company has accumulated debt since 2007, with its debt rising from R40bn, to R420bn in 2018.

At the same time, the minister soft-landed the very necessary debate about the role that SOEs play in South Africa’s economy. In the past, the minister has made clear his aversion to the state owning some entities such as South African Airways which plays no role whatsoever in contributing to the achievement of South Africa’s developmental goals. This is a hot potato discussion in South Africa currently. With elections coming up, it is perhaps one that the government and the ruling party do not want to dabble in too much as it can be very polarizing and will open the ANC up to internal discord as there is a very strong lobby within the party against moves to privatize SOEs.

It was also notable that the minister made clear that from henceforth, government would take a stricter approach to issuing government guarantees and bailouts to SOEs for operational purposes. Even a financially illiterate person knows that banks would never fund you to buy groceries against a growing debt burden. It thus makes no sense that government has been throwing out lifelines to SOEs who are struggling to improve their performance and depending on government’s largesse for their continued operations.

The issuing of policy guidelines by the Department of Communications to the Independent Communications Agency of South Africa (ICASA) for spectrum allocation is a positive step. It follows on statements by President Cyril Ramaphosa to make the price of communications more affordable if South Africa is to achieve its ambitions of becoming an active participant in the Fourth Industrial Revolution. It is also a wink to the upcoming general elections as the price of data has been something that South Africans, especially the young, have been very vocal about.

Similarly, a fully subsidized education and training for poor students at a cost of R111.2bn is an investment in South Africa’s future. Enabling 2.8 million poor South Africans to gain access to higher learning institutions is a move in the direction, even if this affects the fiscal framework negatively in the short- to medium term.

The announcement to freeze the salaries of Members of Parliament, Provincial Members of Parliament, as well as the executive is something of a gimmick, though it makes sense symbolically. However, the announcement may portend a new way of doing things which recognizes that state leaders cannot continue to receive preferential treatment whilst the general public is expected to make ends meet.

The review of South Africa’s allowances for civil servants stationed abroad is probably justified given the difficult fiscal conditions the country is grappling with. However, the government will need to manage the review carefully to ensure that ultimately, the best skilled people are attracted to serving in the diplomatic services of the country.

Unfortunately, money is a major incentive for accepting a posting to a place such as Mauritania, Burundi or Russia. The same care should be exercised in managing the public sector wage bill as government is already struggling to attract the most talented. Delivery against the important objectives that government has set requires good minds, and absolute personal commitment to serving the South African public. The best talented will not forsake the potential for high pay in the private sector for a place that has a bad reputation, and which has bad salaries. This is a fact!

Reducing the size of the public service is a good decision. The president and his cabinet will require strong backing from the entire ANC and alliance to make this happen. We know that South Africa’s labor unions are very vigilant against job losses. The mere whiff of restructuring at Eskom was enough to motivate the National Union of Metalworkers of South Africa (NUMSA) to picket Eskom, even in the absence of a definite pronouncement about laying off workers.

Similarly, government was forced to walk back any latent ambitions to downsize the South African Broadcasting Corporation (SABC), against the wishes of the board of directors, to placate the Communications Workers Union (CWU) which declared in no uncertain terms its displeasure at the plans of the corporation to reduce the workforce.

It is encouraging to hear that President Ramaphosa took an active, detailed interest in the preparation of the Budget. This probably speaks to the anxiety the president has about ensuring that the important programs that he announced during his State of the Nation Address are properly resourced. It also speaks the urgency with which the president views the matter of stabilizing South Africa’s economy.

 

  • Thembinkosi Gcoyi

Managing Director

Frontline Africa Advisory

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