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South African Economy on the path of growth

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The South African economy expanded an annualized 2.5 percent on quarter in the three months to June of 2017, ending two quarters of contraction and beating market expectations of a 2.1 percent rise. It is the highest growth rate in a year with agriculture, forestry and fishing making the largest upward contribution, namely field crops and horticultural products.

Agriculture, forestry and fishing jumped 33.6 percent, higher than a 23.1 percent increase in Q1. Additional upward contributions came from finance, real estate and business services (2.5 percent, recovering from a 1.2 percent decline in Q1); mining and quarrying (3.9 percent compared to 13.1 percent in Q1), namely coal, gold, manganese ore and iron ore and other’ mining and quarrying including diamonds; manufacturing (1.5 percent to -3.7 percent in Q1), mainly food and beverages, motor vehicles, parts and accessories and other transport equipment; electricity, gas and water supply (8.8 percent compared to -4.8 percent); transport and communication (2.2 percent compared to -1.6 percent in Q1); trade (0.6 percent compared to -5.9 percent in Q1) and personal services (1.1 percent compared to -0.1 percent in Q1).

In contrast, general government services decreased by 0.6 percent (-0.7 percent in Q1) and construction went down 0.5 percent (-0.8 percent in Q1), with falls seen in both residential and non-residential buildings.
Year-on-year, the economy advanced 1.1 percent, above 1 percent in the previous quarter and the highest annual growth rate in two years. Considering the first half of 2017, the economy advanced 1.1 percent.

The Growth Activators

Agriculture

Agriculture continued to show strong recovery from South Africa’s recent drought, increasing production by 33.6%. The rise in the second quarter was mostly driven by a rise in the production of field crops, in particular maize and wheat, as well as increased production of horticulture products such as vegetables.

South Africa is on track for record-breaking maize crops if production continues at estimated levels, according to figures from the Crop Estimates Committee (CEC). The CEC expects the country to produce 16.4 million tonnes of commercial maize in 2017, more than double the last year’s harvest, and higher than the current record of 14.7 million tonnes produced in 1981.

The bumper crop has already provided some relief for cash-strapped South African households. Higher stocks of maize and wheat have begun to dampen prices, with bread and cereal prices falling month-on-month for six consecutive months, according Stats SA’s most recent consumer price figures (February to July).

The Finance Industry

Reserve Bank of South Africa

The finance industry was the second largest contributor to GDP growth in the second quarter of 2017, growing by 2.5% on the back of higher activity in financial intermediation and auxiliary activities.

The Mining Industry

The 1970s are best remembered for disco, bell-bottoms, and the mesmerising lava lamp. It was also the decade that saw South African mining forge ahead in its influence on the economy and employment. How has the economy in general and mining in particular, shifted since then?

Mining’s contribution to total economic production climbed in the 1970s to peak at 21% in 1980. Contributing to the upward surge in 1980 was a relatively high gold price. In other words, for every R100 that the South African economy produced that year, R21 was due to mining. In 1987, employment in the industry peaked at just over 760,000 individuals.

Of course, mining is not the only industry that contributes to the South African economy. A different animal was the South African economy in 1980 compared with the economy that was in 2016, as shown in the graphic below.

Manufacturing was the largest industry in 1980, falling to fourth place as of 2016.

Mining was the second most influential industry in 1980, with its 21% contribution to the gross domestic product (GDP). In 2016, the industry contributed 8%.

Agriculture also slipped in ranking to fall from seventh to tenth place, contributing 2% to the GDP in 2016.

As the primary and secondary sectors of the economy waned, the tertiary industries took centre stage. The most notable climber was finance, rising from fourth place in 1980 to become the largest industry in 2016. Government was not far behind, rising in the ranks to take second spot.

Even though mining has lost some of its shine, it is still an important employer. The size of the mining workforce in 2015 was estimated at 490 146 individuals, according to Stats SA’s recent census of mining report. The PGM (platinum group metals) industry has the largest workforce, followed by gold and coal.

Coming into the second quarter of the year 2017, the mining industry has expanded by 3.9% on the back of increased production of coal, gold and ‘other’ metal ores such as iron ore and manganese ore. This is the second consecutive quarter of growth for mining, although production was more subdued than the 13.1% growth recorded for the first quarter of 2017.

Other notable features of the second quarter include positive growth in manufacturing (1.5%) after three consecutive quarters of decline and a strong rebound in electricity, gas and water (8.8%).

The 2.5% rise in GDP brings to an end South Africa’s second recession since 1994. However, there are a few statistical points to note. Firstly, quarterly growth rates can be quite volatile. Secondly, the headline figure of 2.5% is the growth rate after annualisation, in other words what the annual growth rate would be if the quarterly rate were to be repeated for four consecutive quarters. Thirdly, if we compare the first half of 2017 with the first half of 2016, the growth rate was 1.1%.

Although the headline figure is the most publicised, the key lesson is that it should not be used in isolation. There are other GDP indicators that complement the headline figure, and taken together they provide a more comprehensive picture of economic performance.

So even though 2.5% might seem like an impressive recovery, longer-term indicators show subdued growth. As a nation, the goal of achieving and sustaining higher rates of economic growth and development remains just as important as ever.

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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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