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South African Economy Outlook Q2 2017



Incoming data for H2.17 is evidencing that while sub -Saharan Africa continues to experience subdued growth on the commodity price effect, globally economic activity is picking up, but structural impediments in many sub-Saharan countries, South Africa included, will limit the lift gained from the (modest) global upswing.

While commodity prices have recovered to some extent, many commodity exporters are reported to be finding commodity price levels still insufficient and government debt levels have been rising, particularly in sub-Saharan countries where this has increased uncertainty and so negatively impacted investment.

S outh Africa suffered from a contraction in investment last year (2016), and government gross debt has escalated from 22% of GDP in 2008/09 to 45.7% of GDP in 2016/17. Uncertainty has risen too on the political and economic policy front with South Africa currently seeing its key credit ratings split between investment grade (IG) and sub-investment grade (SG).

Moody’s and S&P have South Africa local currency (LC) long-term sovereign debt (LSD) on investment grade, while Fitch has it on sub-investment grade. South Africa’s foreign currency (FC) long-term sovereign debt is investment grade from only Moody’s, while Fitch and S&P have it on sub-investment grade.

This three/three split will likely persist after Moody’s country review of South Africa, as the agency is expected to move its local currency and foreign currency long-term sovereign debt ratings down by only one notch (still investment grade). South Africa bonds would then not fall out of the World Government Bond Index (WGBI), with likely little further impact on the rand from this source this year.

However, with country reviews from Fitch and S&P twice a year at least, and the possibility of ratings changes between scheduled reviews, the possibility of further downgrades cannot be excluded, which has heightened uncertainty.

A 35% weighting is ascribed to this down case of further credit rating downgrades and a 35% weighting to the expected case. With the World Government Bond Index holding a large amount of South Africa’s LC (local currency) LSD (long-term sovereign debt) the rand could weaken substantially if this Citibank fund has to sell its South African bonds (local currency long-term sovereign debt), given the large size of its holdings.

The rand and bond yields were to a significant extent shielded from April’s credit rating downgrades by the strong risk on financial markets as foreign investors were heavy purchasers of Emerging Market debt globally.

Looking forward for the rand much will depend on the global cycle, with the domestic currency at high risk of volatility, and weakness in particular from further credit rating downgrades and/or a risk-off global environment.

Expansionary fiscal policy in the US is still expected to drive growth, while the European recovery continues, with manufacturing activity and trade improvements of 2016 still noted globally, and indications that this persisted into H2.17. The feed through into investment and imports is expected to persist, strengthening global economic activity.

Figure 4: Commodity and oil markets and advanced economies PMI’s

Source: IMF WEO April 2017 and Bloomberg / Economist

However the slowdown in China and moderation in commodity prices has impacted emerging market growth, with only a modest pick-up expected. In sub-Saharan Africa a lift in growth is expected as well (see figure 2), with South Africa’s pick-up in growth more modest. Commodity prices are generally expected to rise this year and next, but only modestly, and not reaching the heights of 2011 (see figure 4).

In this modest global growth environment, with only a gentle upward trend in commodity prices, commodity exporters cannot expect a substantial boost to economic growth from this source. Rising government debt levels will need to be reined in, with South Africa receiving a credit rating downgrade this year on its escalation in debt to GDP since 2009 in a declining growth environment (with substantial contingent liabilities on its balance sheet from the guarantees to its state owned entities).

The credit rating downgrade is not expected to precipitate an interest rate hike this year, with the impact on the rand and bonds proving limited in the global risk-on period. The Forward Rate Agreement curve is flat to down this year while the US is expected to hike by two to three 25bp increments in 2017.

CPI inflation is expected to moderate in South Africa this year, and next year as food prices moderate and demand pressures remain weak in the economy as economic growth remains below trend until 2022. The fall in fixed investment (Gross fixed capital formation) in South Africa in 2016 (see figure 9) was driven by state owned entities and the private sector, with growth in government investment slowing down sharply.

The IMF says “rising public sector debt is becoming a cause for concern in sub-Saharan Africa …the ratio of public debt to GDP has increased …to an average of 42 percent of GDP in 2016 (and a median of 51 percent). This is the highest value since many countries received debt relief in the 2000s under the Heavily Indebted Poor Countries/Multilateral Debt Relief Initiative.”

South Africa’s fiscal constraints have led to lower investment growth for government and State Owned Enterprises, with the bulk of state expenditure focused on social services and civil servant remuneration, while the country continues to run a primary deficit.

At 46% of GDP South Africa’s debt to GDP ratio is similar to the debt to GDP ratio inherited by the ANC tripartite alliance in 1994 with the advent of democracy, when the fiscal deficit for national government was close to 7% of GDP. At that time South Africa’s credit ratings were sub-investment grade. The IMF notes “prudent fiscal policies play a special role in sustaining growth.

spells in sub-Saharan Africa: a better fiscal balance significantly increases the chance that a growth spell will continue, while conversely, a higher debt burden can accelerate its end. …in particular …a lower debt-to-GDP ratio tend to prolong growth spells in the (sub-Saharan African) region.”

The IMF adds currently that “weakening commodity exports, the ensuing sharp slowdown in economic activity, and the build-up of government payment arrears to contractors are all restricting private firms’ capacity to service their loans to various degrees across the region.” Business confidence has essentially remained at depressed levels since 2009, with an average of 59% of business dissatisfied with business conditions.

The close link to fixed investment has shown a contraction in private sector investment over the period. Heightened uncertainty, reflected in poor confidence levels leads to lack of investor appetite, as does anaemic domestic demand. Industrial production is expected to be weak, but positive over the forecast period of 2017 to 2021.

Consumer confidence has been very weak over the period, with gross national income per capita falling in real terms in 2016, both of which have subdued real household consumption expenditure (HCE), and so GDP growth.

With Moody’s still to review South Africa’s country credit local currency and foreign currency ratings, but likely to keep them investment grade, it will be December’s country reviews which could have a ratings impact on the rand, unless further political disturbances this year promote another round of downgrades.

A more gradual trajectory than previously is likely in the return to PPP, given the recent downward trend in credit ratings. The rand could therefore reach PPP in 2020, where PPP valuation will then be closer to R11.50/USD. Loss of another investment grade local currency long-term sovereign credit rating would delay the return to PPP further, while loss of all investment grade local currency long-term sovereign credit ratings would mean the rand would be unlikely to return to PPP.

Unless otherwise stated all views in this narrative are of the baseline case. South Africa has lost growth momentum, with the economy in a downward growth trend over the past several years. Economic growth of around 1.0% y/y is insufficient to prevent further credit rating downgrades, particularly if government debt to GDP ratios does not fall and there is insufficient State Owned Enterprise reform.

The agencies also point to concerns on GDP per capita and the possibility of future government policies undermining economic or fiscal strength -the latter weakening business confidence.

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South Africa

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



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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