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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

Tito Mboweni’s Budget for the Tough Times: Planting the seeds of future economic success

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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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