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South Africa

Weak Economic Growth Knocks ‘Ramaphoria

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South Africa’s economy contracted in annualized terms in the first quarter, pointing to the end of the so-called “Ramaphoria” that followed the new president’s appointment in January, and highlighting the ongoing challenges facing the economy. Data released by Statistics South Africa showed the economy shrank 2.2% on a quarter-on-quarter basis and in seasonally-adjusted annualized (SAAR) terms, reversing the strong outturn recorded in the fourth quarter of last year (Q4 2017: +3.1% SAAR). Driving the broad-based moderation—the worst since the depths of the financial crisis—were contractions in the mining and manufacturing sectors, as well as in the agricultural sector.

Note: Year-on-year changes of GDP in %
Source: Statistics South Africa (Stat SA)

After Jacob Zuma was forced out as leader by the ruling party in February, Ramaphosa pledged to clean up governance, deal with high unemployment and improve basic services, igniting a wave of optimism dubbed “Ramaphoria”.

South Africa’s economy has barely grown in the past decade with fiscal missteps and corruption contributing to weak business and consumer confidence.

However, the poor gross domestic output (GDP) in the first three months of 2018 will erode some of the enthusiasm in Africa’s most industrialized economy. The rand weakened by almost one percent against the dollar in response. The rand lost ground against the major currencies as well in midday trade on 5th June 2018:

  • Dollar/Rand: R12.64 (0.60%)
  • Pound/Rand: R16.90 (1.00%)
  • Euro/Rand: R14.78 (0.59%)

GDP contraction was led by a slowdown in agriculture and mining, after its strong growth in the final quarter of last year, Statistics South Africa said with the electricity, construction and trade industries also recording negative growth, the group revealed.

The 2.2% fall is the largest quarter-on-quarter decline since the first quarter of 2009. In that quarter, the economy contracted by 6.1%.

After recording four consecutive quarters of robust growth in 2017, the agriculture industry lost ground in the first quarter of 2018, contracting by 24.2%, the largest quarter-on-quarter fall since the second quarter of 2006.

Agriculture’s relatively strong performance in 2017 is one of the positive factors that helped keep the economy afloat in 2017. This momentum failed to carry through to 2018, with decreased production in field crops and horticultural products contributing to the decline in the first quarter.

Mining entered into recession with its second consecutive quarter of economic decline. According to Stats SA’s data, production was down 9.9% in the first quarter of 2018, following on from a decrease of 4.4% in the fourth quarter of 2017. Lower production in gold, platinum group metals and iron ore were the main contributors to falling performance.

“Manufacturing also failed to make a positive contribution to economic growth, falling by 6.4%. The decline was driven largely by a fall in production of petroleum and chemical products, as well as basic iron and steel,” Stats SA said.

“The trade, construction and electricity industries also recorded negative growth in the first quarter of 2018 compared with the fourth quarter of 2017. Trade activity fell by 3.1%, on the back of weaker wholesale, retail and motor trade sales and lower activity in catering and accommodation.

“The construction industry continued to contract, experiencing its fifth consecutive quarter of decline. The industry has lost R1.7 billion in value since the fourth quarter of 2016, falling from R110 billion to R108 billion in the first quarter of 2018 (constant 2010 prices, annualized),” the group said.

Economic activity in transport, finance, personal services and government increased in the first quarter of 2018. The 1.8% rise in general government was mostly related to increased employment numbers in the public sector, it said.

The first-quarter reading upset analysts, who had expected a more moderate 0.5% SAAR contraction. In a survey conducted by Reuters, some economists had expected a quarter-on-quarter GDP contraction of 0.5 percent. “Today’s downbeat figure will dampen some of the enthusiasm surrounding President Cyril Ramaphosa,” Capital Economics senior emerging markets economist John Ashbourne said.

“South Africans themselves were also optimistic; consumer confidence jumped to an all-time high in first quarter. But this ‘Ramaphoria’ does not seem to have translated into stronger spending,” he said, adding a swift turn-around was unlikely.

Furthermore, on an annual basis, growth slipped to 0.8% (Q4 2017: +1.5% year-on-year). “GDP rose 0.8 percent on an unadjusted year-on-year basis in the first quarter, compared with a 1.5 percent expansion in the previous three months,” the agency said.

Adding to evidence that economic growth remained fragile, a survey showed South African private-sector activity was at a standstill in May, with an increase in new orders and rising employment offset by a contraction in output.

“A contraction in GDP for the first quarter of 2018 was expected, but it won’t completely derail growth forecasts for 2018,” according to another economist.

In a market report FNB Chief Economist Mamello Matikinca said that the contraction is usually expected in consumption-driven economies, especially off the back of a high base set in the previous year.

“GDP growth for 2017 was 1.7%, as growth in the fourth quarter was 3.1%. As we have communicated in previous weekly publications, we expect a Q1 ’18 GDP contraction of approximately –1% q/q,” she said.

“We expect much of the weakness to stem from the mining and manufacturing sectors, while a disappointing retail trade number has the potential to drag our forecast number lower.”

Growth in the agriculture sector is viewed as a “wild card” and the double-digit growth recorded in previous quarters may not be sustained, Matikinca warned.

“Our calculations suggest that a small contraction in GDP will not derail the 2018 growth forecast of 1.9% as the quarterly year-on-year number will remain positive.

“We would have to see a contraction of more than –3% q/q for us to consider revising our full year number lower,” she explained.

Manufacturing data for April will be released soon. Matikinca expects a better report than the -1.3% year-on-year contraction recorded for March. “A positive print will be a good start for the sector which is still trying to gain traction as domestic economic growth begins to accelerate.”

Domestic demand eased markedly, held back by across-the-board slowdowns. Growth in household spending more than halved, slowing to 1.5% SAAR (Q4 2017: +3.6% SAAR) as consumers were pinched despite moderating inflation and a stronger rand. Growth in government spending, likewise, slowed to 1.2% SAAR (Q4 2017: +1.6% SAAR), which nonetheless reflected an increase in state-paid employees. Fixed investment contracted 3.2% SAAR in the quarter (Q4 2017: +7.4% SAAR) on a nearly broad-based decline in activity—including residential and machinery outlays, as well as construction activity. Non-residential investment, on the other hand, was the only subcategory to record growth. Modest buildups of inventories, which contributed 0.1 percentage points to the headline reading, were recorded in the manufacturing and utility industries.

The external sector also posted a disappointing outturn, with exports of goods and services falling 16.5% SAAR (Q4 2017: +12.3% SAAR) on falling trade in base metals and mineral products—coinciding with the contraction in mining output. Meanwhile, imports of goods and services fell 6.5% SAAR as machinery and vehicle imports plummeted. Taken together, the external sector subtracted 3.1 percentage points from the headline reading—a modest improvement from the 4.0 percentage points subtracted in the fourth quarter last year.

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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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