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South Africa’s GDP growth could surpass expectations but unemployment still persists

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The South African economy has been off to a good start in 2018. Statistics South Africa, the country’s national statistical service, released national accounts figures with revisions that pointed to more positive momentum in the economy than previously thought.

South Africa grew by 1.3% in 2017, beating the consensus estimate of economists, and the revised numbers no longer record a technical recession early in the year.

I n the six-monthly Monetary Policy Review that was held in April, The Reserve Bank of South Africa opined that “South Africa’s economic growth could pick up faster than forecasted if the right structural reforms are implemented”.

That means the economy could expand faster than the 2% for 2020 the central bank projected in the previous month, a rate it hasn’t exceeded since 2013. Since the turn of 2018, confidence has been up as the new political leadership under President Cyril Ramaphosa has demonstrated a strong commitment to strengthening institutional integrity—especially in stateowned enterprises—reaching out both to business and labor, and pronouncing his intention to build a new social compact in the country.

Cyril Ramaphosa replacing Jacob Zuma as head of the ruling African National Congress in December and as president two months later boosted sentiment and the currency on hopes of structural reforms in Africa’s mostindustrialized economy.

While Ramaphosa has since changed the cabinet to remove some Zuma appointees who were seen as compromised, overhauled the board of the state power utility and pledged to root out corruption, confidence indexes show business and investors now want to start seeing real reforms.

“The pickup in growth is not especially strong,” the central bank said. “This is mainly because, at this early stage, there is little clarity around the reform agenda and without specifics it is difficult to quantify growth responses.”

Ratings agencies similarly highlighted South Africa’s slow economic growth as a major concern. The National Development Plan affirms that South Africa’s economy needs to grow at an average of 5.4% annually in order to address the country’s high unemployment rate, which is at 27%.

However, there is a growing optimism around the country, which is shared by some of the major credit ratings agencies, that under President Cyril Ramaphosa’s leadership, SA’s gross domestic product (GDP) growth could surpass expectations.

In March 2018 Standard & Poorʼs global ratings revised South Africa’s GDP growth forecast for 2018 upwards, from 1% to 2%, citing a strengthening domestic and foreign investor sentiment following a change in the countryʼs leadership and ensuing policy announcements.

An ongoing global upturn is also boosting demand for both commodities and manufactured goods, the ratings agency said. It warned, however, that this was not enough to address the country’s unemployment crisis. Ratings agency Moody’s also gave South Africa a reprieve when it maintained the country’s sovereign rating at Baa3, one notch above junk status, with a stable outlook.

It cited, among other reasons for the decision to keep South Africa at investment grade, the change in the political leadership and the recovery of the country’s institutions. A downgrade would have been devastating for South Africa as it would have meant that all the three major ratings agencies had the country’s foreign currency and rand-denominated debt at sub-investment grade.

The country’s debt service costs, which are currently at R180 billion, would have increased by between R20 billion to R30 billion overnight, triggering South Africa’s expulsion from the Citi world government bond index and projected capital outflows of R100 billion. “We had to defend the [credit] rating with our lives,” said the National Treasury DirectorGeneral, Dondo Mogajane.

“Some investors that we spoke to were already saying, ‘If ever Moody’s downgrades you, we have been instructed by our credit committees to reduce our exposure by 90%,’ so holding guard on Moody’s was quite critical this time around.”

The currency on the other hand has also gained 9% since Ramaphosa was elected ANC leader, helping to lower price pressures. Inflation slowed to an almost three-year low of 4% in February. The central bank forecast it will remain in the 3% to 6% target band until at least the end of 2020, stabilising at just more than 5%. While current inflation is unusually low, recent developments in services prices and inflation expectations “provide some evidence that positive price shocks, if properly managed, can engender permanently lower inflation,” the central bank said.

The Reserve Bank assumes electricity prices will rise 7.3% in 2019 and 8% in 2020. The central bank’s approach is to wait for an announcement from the energy regulator before adjusting inflation projections, Governor Lesetja Kganyago told a forum on the Monetary Policy Review. “We hope sanity will prevail in terms of the increases granted,” he said. The Monetary Policy Committee cut its benchmark repurchase rate to 6.5% in March. The possibility of higher global interest rates, and its effect on inflation through the exchange rate, means the MPC is “not committing to a rate-cutting cycle.”

Finally, the 2018 budget returned to the government’s long-standing commitment to fiscal consolidation, which appeared to have been temporarily abandoned in the 2017 Medium-Term Budget Policy Statement. Business and consumer confidence is up, and market appetite for South African securities strengthened.

The rand strengthened by about 12% since the African National Congress (ANC) elective conference and 10-year government bond yields are down to levels last seen in 2015, reducing borrowing costs.

Fueled by the confidence boost—and much more benign inflation—South African growth is expected to accelerate. Many economists, including those at the World Bank, have revised their growth forecasts upwards. In its latest publication, the 11th edition of the South Africa Economic Update, the Bank predicts growth of 1.4% in 2018 and 1.8% in 2019 (previous estimates were 1.1% and 1.7% respectively).

The estimates are on the conservative side. This is largely owed to the fact that confidence still needs to translate into consumer spending, which may be weighed down by the revenue measures of the 2018 budget, and into investment. There are several reasons that may keep investors cautious.

Mining is still held back by uncertainty over legislation, even though the government has reached out to resolve disputes over the country’s third Mining Charter. In addition, World Bank projections suggest that prices for South Africa’s raw materials will remain modest or decline (as in the case of coal).

Following the vote in parliament in early 2018 to review the Constitution to potentially make it easier to expropriate without compensation is likely to weigh on investment in commercial agriculture. The manufacturing sector has been struggling to increase global competitiveness and its weak integration into global value chains limits its opportunities to grow with the world economy.

Indeed, the January and February lift in the Purchasing Managers Index, which indicates the economic health of the manufacturing sector, was not sustained, falling back into contractionary territory in March. Whether growth picks up beyond a modest cyclical rebound will depend on the government’s ability to deliver against high expectations to reduce policy uncertainty and accelerate structural policies that can raise the growth potential of the South African economy more meaningfully.

The most recent economic update simulates various reform scenarios and their impact on jobs, poverty, and inequality. It holds some potential good news for South Africa, as inequality is likely to decrease from current levels (South Africa is the most unequal country in the world, according to the Bank’s recent Poverty and Inequality Assessment).

Growth and jobs creation will play an important role in making South Africa less unequal, which will help the government’s efforts to strengthen the social compact.

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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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