Ramaphosa’s dream of growth in tatters
SA enters its first recession since 2009 Market reaction swift, rand hits new two-year lows
SA will struggle to register barely positive growth for 2018.
That is the reality facing President Cyril Ramaphosa, six months after he was swept to power on a wave of optimism that he would reverse the decay of the Zuma years.
His dream of boosting growth to 3% this fiscal year is in tatters, and leaves him vulnerable to opponents both inside and outside the ANC as he prepares to fight an election in 2019, hobbled by a near 30% unemployment rate, which is set to rise further.
Shock data from Stats SA on Tuesday showed that the economy contracted 0.7% in the second quarter, adding to a 2.6% decline in the previous three months (initially reported as a 2.2% decline).
It is the first recession since 2009, when the economy was caught up in the midst of the worst global financial crisis since the Great Depression.
The reaction from the market was swift and brutal on Tuesday, with the rand weakening to R19.75 against the pound, its weakest level since June 2016 — one of the most chaotic periods of Jacob Zuma’s presidency, marked by credit downgrades and midnight cabinet reshuffles. The currency
crashed through R15/$, also for the first time since June 2016, and was 3.4% weaker at R15.37 at 7.30pm on Tuesday.
Stocks and bonds also sold off, reflecting concern that a shrinking economy will further damage SA’s fiscal position and attract the attention of credit ratings agencies at a time when revenue collection is falling behind.
The benchmark R186 government bond was last bid at 9.22% from 9.02%, while the JSE all share closed 1.4% lower.
Goldman Sachs downgraded its growth forecast for SA from 2% to 0.8%, while Nedbank said it expected the economy to expand only 0.5% in 2018.
The numbers show a contraction in household consumption, with finance minister Nhlanhla Nene admitting that the VAT and petrol price increases have hurt consumers.
Fixed investment has also declined in an environment where investors are expressing concerns about the government’s plans to change the constitution to explicitly allow for the expropriation of land without compensation, a move that critics believe will undermine broader property rights.
Speaking from Beijing in China‚ where he is attending the Forum on China-Africa Co-operation‚ Nene said it is understandable that there is panic in the country but insisted the government has a plan to be unveiled at the medium-term budget policy statement (MTBPS) in October.
“We understand the impatience of South Africans because we want things delivered as of yesterday‚” Nene said.
“The real reform package that comes out of the cabinet process is in the pipeline.
“There are formal processes under way‚ some of them culminating in the upcoming investment conference that the president is going to be holding in October‚ but also the MTBPS‚ because some of these are actually policy issues, so I would imagine that by the time we go to the MTBPS‚ we should have concluded them.”
Economists are sceptical about the government’s stimulus plans.
“Government does not have the fiscal headroom to add any impetus to growth, particularly as current spending continues to crowd out infrastructure investment,” said FNB senior economic analyst Jason Muscat.
Absa’s head of macroeconomic research, Peter Worthington, agreed, saying there is “no budgetary room for a big fiscal stimulus package, with the credit ratings agencies watching SA’s precarious fiscal debt dynamics carefully”.
Credit ratings agencies have given SA a reprieve so far in 2018 after a slew of downgrades in 2017 following the surprise cabinet reshuffle and an illreceived MTBPS last October.
All three major credit ratings agencies have warned that SA’s ratings are constrained by the slow pace of growth.
Further credit rating downgrades would mean SA’s cost of borrowing would increase.
“Ratings agencies have said that what you really need is growth, and without growth you won’t be able to address anything else,” said Citadel chief economist Maarten Ackerman.