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



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

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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