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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

The key economic and political risk events to haunt South Africa’s economy in 2019

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South Africa’s much anticipated economic rebound in 2018 did not occur. While substantial efforts by the authorities to strengthen governance of public resources and stabilize the fiscal situation helped the economy to not contract further, economic growth remained tepid with a technical recession (two successive quarters of negative economic growth) in the first half of 2018. GDP growth is expected at below 1% in 2018, down from an already low 1.3% in 2017.

A number of exogenous factors contributed to this poor growth performance. Domestically, climate variations such as a prolonged drought in the Western Cape where harvests were delayed exerted a huge toll on agricultural production. Externally, mounting trade tensions between the United States and China, and tightening global financial conditions contributed to slowing the pace of foreign financial inflows to South Africa while lessening the demand for its exports. Rising world oil prices also exerted strong pressure on the balance of payments and domestic prices, depressing private consumption.

These negative developments, however, do not conceal the fact that South Africa’s growth challenge is deep-seated and largely structural. To grow faster and sustainably, the economy will need to be more inclusive, requiring the participation of a greater share of the population mainly through job creation.

Furthermore, persistent inequality of income and of opportunity will continue to raise pressures for redistribution of limited resources that are drawn from a small tax base. Radical policy demands are more likely in a stagnant economy, fuel policy uncertainty and deter private investment. At the Presidential Jobs Summit and the South African Investment Conference held in October 2018 agreements were made on actions that are expected to enable job creation and to attract higher levels of investment, including inter alia, education and skills interventions, and initiatives to reduce policy uncertainty on land reform, mining and black economic empowerment.

The financing of structural reforms and projects to promote greater economic and social inclusion is nonetheless rendered difficult by South Africa’s tight fiscal and debt situation, itself mainly the consequence of slow growth and strong spending pressures.

As in most previous budget speeches, the commitment to public debt stabilization was reaffirmed in the October 2018 Medium Term Budget Policy Statement (MTBPS), but the target date for debt stabilization was shifted yet again, this time to 2023/24, and at a higher level, to 59.6% of GDP against 56.1% in the 2018 Budget Review.

Though in a significant departure from previous statements, there was clear recognition of the greater role the private sector, development finance institutions, and multilateral development banks could play in complementing scarce public finances for infrastructure. Regulatory reforms, lowering the risk of financial instruments to facilitate private sector investment, and a clearer delineation between commercially viable and socially desirable interventions were identified as instrumental to breaking a vicious cycle of low inclusiveness coupled with limited public resources to speedily address the challenge.

South Africa’s economy after experiencing a recession last year may be even bumpier in this 2019. Here’s a look at the key economic and political risk factors to watch out for in 2019:

The budget

After Finance Minister Tito Mboweni painted a bleak picture for finances in October 2018, attention will turn to his plans to boost growth and prevent debt from spiralling out of control at the budget presentation in February. The national budget is a “key pressure point,” Intellidex’s head of capital markets research, Peter Attard Montalto, said in a note. The absence of concrete plans to boost economic growth could trigger a change to negative in the outlook on South Africa’s credit ratings.

Credit rating

A downgrade to junk by Moody’s Investors Service would trigger forced selling of bonds by investors tracking investment-grade indexes, including Citigroup’s World Government Bond Index. That’s “very likely,” according to David Hauner, Bank of America Merrill Lynch’s head of cross-asset strategy for Eastern Europe, the Middle East and Africa. Moody’s didn’t publish a review as scheduled in October 2018, while S&P Global Ratings and Fitch Ratings have kept their sub-investment grade assessments. Ratings companies may be waiting for the budget data before making another call.

State companies’ debts

Troubled state-owned companies will continue to weigh on the country’s finances, with their combined debt of R1.6 trillion. Almost half that is guaranteed by the government, the Treasury said in October 2018. Power utility Eskom needs R20.1 billion to meet its obligations in 2019, national carrier South African Airways needs to repay R14.2 billion by March 2019 and the state broadcaster has warned it won’t be able to pay staff unless it gets R3 billion from the government by February 2019. George Herman, chief investment officer at Citadel Investment Services, predicts a “worst-case scenario” for the companies: “the state will have to step in to bail them out,” he says.

Expropriation

Lawmakers will report to parliament on March 31, 2019 on changes to the constitution to make it easier to expropriate land without compensation. While these steps form part of the ruling African National Congress’s plan to accelerate wealth redistribution, commercial banks that hold farm debt could be hit. Lobby groups are gearing up to fight the process in court and the possible protracted legal wrangling could lead to a period of prolonged uncertainty.

May elections

South African elections have been mostly peaceful and accepted as free and fair since the first all-race ballot in 1994, but the run-up to this year’s vote may see an increase in populist rhetoric and constrain the ANC’s room for maneuver. Polls show the ANC maintaining its majority, but the party needs 55% to 60% of the vote to put President Cyril Ramaphosa in a position to implement reforms aimed at reviving economic growth, said Old Mutual Investment Group economist Johann Els. Ramaphosa could overhaul — and shrink — his cabinet after the election.

Reserve Bank

The current terms of two of the Reserve Bank’s most senior officials run out this year. While both could be reappointed, the possibility of changes in leadership will add to uncertainty amid a drive by the ANC to make the central bank state-owned. Deputy Governor Daniel Mminele’s second term ends in June 2019 and Governor Lesetja Kganyago’s first five years at the helm ends in November 2019. The governor and his three deputies are appointed by the president: Kganyago has said he’d be available to serve another term if asked; Mminele hasn’t commented.

What an economist says …

“The increase in foreign participation in the domestic government bond market to 40% from 23% in 2011 is a key risk for South Africa. It makes the rand highly vulnerable to negative domestic events as well as changes in sentiment to emerging markets. With interest payments to foreign bondholders accounting for most of the current-account deficit, South Africa is essentially borrowing more from abroad to service its higher debt load.” – Mark Bohlund, Bloomberg Economics.

 

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