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Prospects of the South African Economy in 2018

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The South African economy in 2017 experienced a fluctuating growth quarter-onquarter basis. The economy grew 2.0% in the third quarter of 2017 (seasonally adjusted and annualised), down from a revised 2.8% in the second quarter

Agriculture, mining and manufacturing were the main drivers of the expansion, while there was a contraction in general government services resulting from low employment numbers in the public sector. After recording an increase of 38.7% in the second quarter, the agriculture industry continued to power ahead, expanding by 44.2% in the third quarter.

This is the largest quarterly jump in agriculture production since the second quarter of 1996. Increased production of field crops and horticultural products were the main contributors to growth, with notable increases in the production of maize and vegetable products. That season’s maize crop is expected to be the largest on record.

The Crop Estimates Committee pegged commercial maize production for that season at 16.74 million tonnes, more than double the 7.78 million tonnes produced last year (2015/16), and higher than the current record of 14.66 million tonnes harvested in 1980/81.

Mining and manufacturing were the other major contributors to economic growth in the third quarter. Increased gold and platinum production saw the mining industry grow by 6.6%, while the 4.3% rise in manufacturing was spurred on by increased production of both petroleum and metal products.

Finance and business grew by 1.2%, helped along by increased activity in financial mediation, insurance and auxiliary services. There was also positive growth in personal services (0.9%) and transport and communication (0.6%).

Four industries, however, saw a decline in economic activity in the third quarter. Falling employment numbers in the public sector saw general government services posting its third consecutive quarter of negative growth, contracting by 0.7%. Other notable industries that saw a decline were trade and electricity, water and gas.

Despite a rebound in retail trade sales, falling wholesale trade sales pulled the trade industry down by 0.4%. The electricity, water and gas industry experienced a 5.5% contraction, a result of falling electricity generation and demand.

Other highlights from the third quarter 2017 GDP release:

  • Unadjusted real GDP was up by 0.8% yearon-year in the third quarter of 2017.
  • The South African economy grew by 1.0% in the first nine months of 2017 compared with the first nine months of 2016.
  • Nominal GDP in the third quarter was estimated at R1.17 trillion.
  • Expenditure on GDP grew by 2.1% in the third quarter, spurred on by a rise in household consumption spending and fixed investment. There was, however, a fall in government consumption spending. Exports were down, but imports were down more, resulting in an improvement in net exports (i.e. exports less imports) and, consequently, a positive contribution to total growth from the external sector.

Economic growth is projected to pick up moderately in 2018-19, as stronger activity in trading partners boosts exports. Investment will support growth in 2019 on the assumption that business confidence increases and policy uncertainty fades.

Despite persistently high unemployment, private consumption will expand as wages increase moderately and food prices stabilize. Falling inflation leaves room for a moderately expansionary monetary policy to support activity. Unexpected slippage of the budget deficit is contributing to growth in the short term, but is also creating more pressure to contain rising public debt and is raising the risk of a further credit downgrade.

Improving the efficiency of public spending and better controlling the deficits of stateowned enterprises are necessary to raise fiscal credibility and create room for public investment to foster growth and reduce social inequality.

The high dependence on external financing is the main source of financial vulnerability. Low investor confidence and credit rating downgrades in 2017 have contributed to a net outflow of foreign investment.

To cushion the transmission of external shocks to the financial system, implementation of the financial sector regulatory reform should be accelerated and foreign-currency-denominated debt issued by private entities further monitored.

Growth is weak as policy uncertainty persists

Economic growth is slowly improving following the drought in recent years, driven by a recovery in agriculture and favorable commodity prices. However, political uncertainty has eroded business and consumer confidence. The deterioration of the fiscal stance will not help to bring back confidence.

Unemployment remains high, reflecting skill shortages and weak investment, and weighs on household consumption. Inequalities in opportunities and incomes remain high.

Policy reforms are needed to boost growth The fall of inflation into the target range (3% to 6%) has opened up space to adjust policy rates to provide stimulus for investment. The central bank already reduced its repurchase

rate from 7% to 6.75% in July 2017. A further adjustment is projected in 2018 as inflation remains within the target range.

The government budget deficit is overshooting due to significant shortfalls in tax revenue and high spending, particularly in the areas of debt-servicing costs, education and defense. The government will have to prioritize expenditure.

Although the widening deficit will support short-term growth by partially sustaining household consumption through social grants, the rising debt makes consolidation imperative to maintain market confidence. Increasing the efficiency of public investment in infrastructure is much needed to boost productivity.

Reforms to ease the cost of doing business, boost entrepreneurship, lift competition barriers in many sectors and facilitate the expansion of firms in the neighboring region would boost productivity and help create jobs. Growth is projected to increase Favorable terms of trade are projected to continue to drive export growth. The introduction of the proposed minimum wage can boost consumption slightly and reduce income inequality.

However, investment will remain weak in 2018 as political uncertainty remains high. Inflation is expected to remain in the upper half of the target range, driven by a stabilization of food prices and a moderate oil price development that counter balances a potential rise in electricity tariffs. The main risks to growth are policy uncertainty and external factors.

Foreign-owned debt is relatively high compared to other emerging market economies; indeed, the majority of the external debt of state-owned enterprises, banks and corporations is in foreign currency.

Further credit rating downgrades could increase the cost of hedging or raise collateral requirements for foreign currency risk. Uncertainty surrounding Brexit may affect exports and financial flows with one of South Africa’s largest European trading partners.

On the upside, the growth outlook could be better if higher-than-assumed commodity prices or capital inflows would provide further impetus to domestic demand. A stronger-thanexpected recovery of business confidence could provide a boost in investment.

 

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South Africa

Eskom Crisis and Rising Unemployment– Woes of the South African Economy

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South Africa’s outlook has been dealt several heavy blows in recent times following Eskom’s financial results, and the latest unemployment data, which has raised the question: where to from here? South Africa’s unemployment rate climbed substantially in Q2 2019, StatsSA said on Tuesday, 30th July 2019.

The Quarterly Labor Force Survey for Q2 2019 showed that the unemployment rate increased by 1.4 percentage points from 27.6% in the first quarter of 2019 to 29% in the second quarter of 2019.

Eskom, meanwhile, reported a record loss for the year ended March 2019, of R20.7 billion, following years of corruption that has seen the power utility’s debt spiral out of control, fueling rumors that international ratings agency Moody’s could downgrade South Africa’s sovereign debt to junk status.

Analysts had hoped for a turnaround in fortunes following the election of president Cyril Ramaphosa, and post general elections in May. However, the country has been dealt one bloody blow after another, raising serious questions about its turnaround prospects and timeframe, which seems to get further away as both global and local financial institutions narrow economic growth.

Dawie-Roodt-Chief-Economist-at-Efficient-Group

The reason why the state’s finances finds itself in such a death-defying spiral, according to chief economist at Efficient Group, Dawie Roodt, is because, especially since 2009, state spending has increased relentlessly at a time when tax collections collapsed– mostly because of a faltering economy.

“At this rate of debt increase, it is very clear things will turn out very unhappy, very soon,” he said.

Roodt said “note that to fix the problem of collapsing fiscal accounts, a combination of three things needs to happen to stabilise the debt to GDP ratio.

“The first thing is that the economy should preferably start growing at a rate of 6%, at which rate the debt to GDP ratio will stabilise.

“Unfortunately, the ruling elite seems to be hell-bent on doing even more damage to the economy with all sorts of silly socialist ideas, like the suggested creation of yet another state bank, a new mandate for the SARB and the unaffordable NHI. Because of this, economic growth, believe me, will not save us from this fiscal cliff,” he said.

A second option is to increase taxes by the equivalent of 5% of GDP (current market price), which is approximately R250 billion. For example, VAT needs to increase by more than 11 percentage points to get this kind of money, or personal income taxes need to increase on average by nearly 10 percentage points.

This option, Roodt stressed, is irrelevant as a tax increase of this magnitude would have a huge adverse effect on growth, while overburdened taxpayers would likely revolt.

“Preferably, and the only realistic option left, is to cut state spending with a similar amount: R250 billion,” Roodt said.

“Percentage wise that is a real reduction in state spending of approximately 15%, or 20% in nominal terms. Now, show me the politician with the clackers to go and give COSATU the good news. But even if we could implement such austerity measures, the initial impact on the economy will be hugely negative – damned if you do, damned if you don’t,” the economist said.

Roodt also delivered a scathing assessment of president Ramaphosa.

“Judging from president Ramaphosa’s actions so far, he must either be weak, doesn’t appreciate the danger in which the South African economy is, or he simply doesn’t care,” Roodt said.

“I think we have a weak president that simply doesn’t have the political capital to implement unpopular structural changes. All that is left for him to do is to use (gutted) institutions, like the NPA, to do the heavy lifting for him. He is playing the “long-game”, but this economy doesn’t have a long time.

“Even if we can somehow wave a magic wand and get rid of all the corruption and incompetence in the state and SOEs overnight, the perilous condition of the state’s finances will need an extraordinary attempt to save us from further economic collapse,” Roodt said.

Roodt said that none of his three scenarios will likely prevent the inevitable: “Debt will continue to balloon, the economy will falter, poverty and unemployment will keep going up and those that are responsible for all the troubles will keep on blaming “the others” for their absurdities”.

“By then the only remaining alternative will be to inflate your debt away. But for that to happen you need to control the SARB – and with Lesetja Kganyago at the helm, that is not going to be easy. But be assured, as we sink further into this debt chaos the pressure on the SARB will become relentless and eventually also the SARB will buckle under the pressure. And then, inflation.”

“What we must understand,” Roodt said, “is that no structural adjustment, no new dawn, no fresh start can be taken seriously unless it includes an admittance that there are just too many trying to live off too few. Many tens of thousands of civil ‘servants’, including those at SOEs, are simply not needed. They must go.”

Economic growth– from bad to worse.

Early second-quarter indicators signal some respite following a sharper-than-expected contraction in Q1 due to rolling power outages. The retail sector picked up in April; car sales, on average, bounced back from the first quarter in April–May; while manufacturing activity grew at a faster pace, on average, in the same two months. Overall growth prospects remain bleak, however, with uncertainty over the restructuring of Eskom, the heavily indebted state-owned power utility, weighing on economic sentiment. Following slight upturns in April, the manufacturing PMI swung back into negative territory in May–June, and business confidence faltered again. The government is considering other measures to aid Eskom in addition to the ZAR 230 billion pledged, while minimizing the risk to public finances and credit ratings. Options on the table include swapping the firm’s sizeable debt for sovereign bonds or using a special purpose vehicle.

The International Monetary Fund becomes the latest key institution to slash its growth forecast for Africa’s most-industrialized economy, which may have fallen into its second recession in as many years. It now expects the economy to expand by 0.7% in 2019, half of what it estimated in in the beginning of the year, and similar to forecasts by the South African Reserve Bank and Bloomberg Economics.

The economy shrank the most in a decade in the first quarter of this year as the nation suffered the worst power outages since 2008.

The National Treasury, which forecast growth of 1.5% in the February budget, is expected to lower its prediction in the October mid-term budget. While the World Bank’s 1.1% estimate seems to be an outlier, it was published as part of its mid-year Global Economic Prospects outlook on the same day that Statistics South Africa released data showing a much bigger-than-expected contraction for the three months through March. South Africa is stuck in its longest downward business cycle since 1945, data from the central bank showed in June.

In all, growth is seen decelerating this year as persistent power outages continue to weigh on economic sentiment and curb investment and private spending. That said, a pickup in export growth should cushion the slowdown. Downside risks to the outlook stem from policy uncertainty surrounding Eskom’s debt restructuring and President Cyril Ramaphosa’s reform agenda.

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