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South Africa’s economy in recession? President thinks otherwise!



With GDP figures for the second quarter of 2018 shrinking by 0.7%, the South African economy slipped into recession. This followed a revised 2.6% contraction in the first quarter of 2018. The widely recognized indicator of recession is two (or more) consecutive quarters of negative growth (real GDP quarter-on-quarter).

Another R-word – “Ramaphoria” – has completely disappeared over the last few months, as the harsh realities of liberating the South African economy has tempered all early hopes of a quick turnaround post-Zuma.

But what is causing all the doom and gloom? Cyril Ramaphosa must be waking up in cold sweats, hearing the faint chuckle of his predecessor in the background, as the task of getting South Africa back on the straight and narrow grows ever more daunting.

The question then is: what must have put South Africa into a recession?

Weak business confidence

The economy can only really get going again if investors are willing to commit their money to expand businesses. Without that, the market is left to stagnate and that lack of ignition creates a Catch 22 situation.

Many investors won’t put their money into anything unless it shows improvement. But while that money is withheld, it becomes difficult for the economy to improve. FNB chief economist Mamello Matikinca told BusinessLive that a lack of confidence is seriously harming the situation:

“The sector continues to be hamstrung by weak business confidence and investment, which has seen the commercial vehicle segment -1.7% weaker year to date.”

Failing sectors

Agriculture production fell by 29.2% in the second quarter of 2018, following a 33.6% slump in the first quarter. This was largely driven by a decline in the production of field crops and horticultural products. Continued drought conditions in Western Cape and a severe hailstorm in Mpumalanga, resulting in extensive crop damage, also placed additional pressure on production in the second quarter.

The transport industry contracted by 4.9%, largely a result of decreased activity in both land and air transport. Industrial action within the industry, combined with a decline in freight transport, contributed to the slowdown.

The trade industry experienced its second consecutive quarter of negative growth, falling by 1.9%. Subdued sales in both motor and retail trade contributed to the decline. South African household consumption expenditure fell in the second quarter of 2018 compared with the first quarter of 2018, in line with the fall in retail trade sales. Households spent less on products such as transport, food, beverages and clothing.

Government activity decreased by 0.5%, largely as a result of falling employment numbers in the civil service.

Manufacturing was the third industry to record a second consecutive quarter of negative growth, following in the footsteps of agriculture and trade. Manufacturing activity fell by 0.3%, driven by a fall in the production of electrical machinery, transport equipment (including motor vehicles), and products within the furniture and ‘other’ manufacturing division.

Fighting corruption

It’s tough to blame President Cyril Ramaphosa for these trying times, however. As much as people are yelling at him to do something about soaring petrol prices, there are many factors out of his control. One of those is the fact that rooting corruption out of government can have negative economic consequences. No good deeds go unpunished, do they?

Kevin Lings of Stanlib explained to eNCA why busting those with their hands in the till can end up starving the economy of the cash injection it really needs to avoid a recession:

“As we start to clean up the amount of corruption and misspending in South Africa, you are effectively tightening up budgets, you are tightening up state-owned enterprises, you’re trying to put budgets in better position and that act of tightening actually results in less spending and less investment initially, so it’s possible that things get worse before they get better.”

You guessed it… land

Both Theresa May and Xi Jinping have given the thumbs up to land expropriation. But that hasn’t done much to settle international confidence. The thorny subject of land redistribution is still causing a bit of havoc with the rand, and it is currently stifling South Africa’s business landscape.

However, their endorsements have only come recently. As in, within the last few weeks as compared to figures that represented the months of April, May and June. This was at a time where the likes of Aussie Home Affairs Minister Peter Dutton were publicly denouncing any plans to expropriate land.

The international seal of approval will perhaps only be felt in Q3. But for now, South Africa waits with baited breath to see if it falls on the right side of the razor-thin margins, to stave off another recession.


The currency crashed to below its level before Ramaphosa took power and the prospect of a potentially catastrophic downgrade by ratings agencies – that would make state borrowing more expensive – now looms.

Forecasts put real economic growth at less than 1% this year. Unemployment – already very high – is rising and inflation is hitting poor people’s budgets hard. “The economy is supposed to be his strong point … but there is just no confidence. The story of the new dawn is just no longer credible,” said Ralph Mathekga, a political analyst and author.

What is Cyril Ramaphosa thinking and doing?

The African National Congress (ANC) President, Cyril Ramaphosa, says South Africans should not be fearful that the economy is in a recession because this is not true. On this note, the President has been called upon to act swiftly to put the economy back on track. In his response to the wakeup call, he said he is confident that his economic plans will pull the country out of its first alleged recession in nine years.

In his earlier indication of instituting an economic-stimulus package, the President shared an outline of the stimulus package adopted by Cabinet to spark economic activity with the business and labor community.

Ramaphosa, who has vowed to revive the economy and clean up corruption, told the meeting he hoped to emulate the infrastructure fund of Indian Prime Minister Narendra Modi, who has mobilized billions from Indian banks to fund highways, airports and power plants.

Ramaphosa first mooted this stimulus package in July, before shock second-quarter GDP data indicated that the economy is in recession, shattering his stated target of 3% growth in 2018.

While no details were provided on the size of the proposed fund or the cost of the package, a statement issued by his office said that Ramaphosa “indicated that the stimulus package will reprioritize government spending, within the existing fiscal framework, towards activities that will stimulate economic activity”.

It said, “The package will include economic reforms … in mining, telecommunications, tourism and transport”.

“The meeting also discussed proposals to establish an infrastructure development initiative that draws in private sector funding and delivery expertise.

“The president welcomed the offer extended by business for the secondment of private sector professionals to government to improve implementation.”

However, several people close to the discussions said that it was not completely settled whether the plan would be deficit neutral and funded out of the existing envelope of government resources, or whether borrowing will be expanded to provide a bigger, more effective stimulus.

Finance Minister Nhlahla Nene — who addressed an “economic consultative forum” — spoke firmly of the package being deficit neutral, arguing that reprioritization of resources towards infrastructure spending would be sufficient to provide the necessary stimulus.

In recent years, the Treasury has been cutting infrastructure spending — mostly in order to reprioritize spending towards funding for higher education and to balance lower revenue collection.

Municipal infrastructure, housing and school building and renovation have all been negatively affected by the cuts, with R46.6bn slashed in 2017/2018; R48.3bn in 2018/ 2019; and R43.8bn in the budget for 2019/2020.

But other government officials argue that with such budget cuts already having been made, as well as additional spending demands such as the higher than budgeted for public sector wage settlement, it will not be possible to provide a large enough stimulus through reprioritizing spending.

A third government official said “it was early days … and things could still change”.

At issue is South Africa’s historically high debt levels, which at 55% of GDP are even higher than when the democratic government first took over management of the economy in 1994.

The Treasury has promised credit-ratings agencies and investors that it is on the path to fiscal consolidation and that it will consolidate gross debt at 56.2% by 2022, after which it is projected to begin falling.

The Treasury has also followed a strict expenditure ceiling since 2012 as part of the fiscal consolidation plan.

However, decisions on the shape and size of the stimulus are urgent. Ramaphosa is believed to want to announce the package soon.

Clarity of the fiscal framework must also be provided well before the medium-term budget policy statement in the last week of October.


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South Africa

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



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.


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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