Nedbank adds to growing consensus of ANC crash
Nedbank, one of SA’s four largest banks, expects policy uncertainty to continue to dominate the economic landscape as the general election approaches, with mounting speculation that the ANC could lose its outright majority in parliament.
It is the latest financial institution to flag the risk of policy uncertainty. Its view supports a growing consensus that the ANC could lose its outright majority, opening the door for a coalition government.
In its economic outlook report released on Wednesday, the bank’s senior economist, Johannes Khosa, said these issues — with increasing changes in the risk appetite of global investors and speculation about the direction of interest rates in the major economies — are a cause for concern.
The report comes a day after the IMF reduced SA’s 2024 real GDP growth forecast to 1% from 1.8% previously, while the forecast for 2025 was cut by 0.3 percentage points to 1.3%, with logistical challenges seen as a key constraint to activity.
The international lender called for SA to implement reforms and lower its budget deficit. It warned that the country’s high borrowing costs are part of what constrains spending and investment.
SA’s largest asset manager, Ninety One, said recently that it expects the ANC to drop below 50% and that it will probably coalesce with small parties. Risk factors are at play, co-head of SA & Africa fixed income Peter Kent warned in a webinar.
Investec, the specialist bank and wealth manager with operations in SA and the UK, said recently that SA’s structural issues, particularly the underperformance of Eskom and Transnet, and the complexity and proliferation of state regulation, are key constraints on economic growth, causing weak business confidence.
Investec chief economist Annabel Bishop said a potential ANC-EFF coalition may have a negative effect on business confidence, economic growth and infrastructure investment, resulting in higher unemployment and disinvestment.
POLITICAL NOISE
Nedbank emphasised SA’s deteriorating fiscal position and uncertainty about the outcome of the election, rand fragility and global risk sentiment.
In the report on Wednesday, Khosa said another potential red flag is a deterioration in the fiscal position, as well as political noise and policy uncertainty before the election, which could discourage foreign investment in SA assets.
Economic growth disappointed in the third quarter, contracting 0.2% quarter on quarter after modest growth of 0.4% and 0.5% in the first and second quarters, respectively, as domestic demand weakened while structural constraints persisted and global conditions remained unfavourable.
Locally, the weakness became more broad-based, Nedbank said. Key producers reduced output substantially and drew down inventories to sustain exports as load-shedding persisted and transport bottlenecks intensified.
Consumer confidence and demand weakened significantly, hit by shrinking real disposable income, sticky inflation and higher interest rates.
Household consumption spending, which accounts for more than 60% of GDP, contracted for the second quarter running, down 0.3% quarter on quarter, due to a further drop in personal disposable income.
“Personal disposable income fell for a third successive quarter, reflecting the erosive impact of elevated inflation, notably high food prices,” Khosa said.
HOUSEHOLDS
“This outweighed the support from employment growth, which helped to reduce the unemployment rate to 31.9% in the third quarter.
“At the same time, households depleted their savings, leaving them heavily exposed to rising debt service costs caused by higher interest rates, and with little choice but to cut back on spending,” he said.
But the bank has a positive projection for the fourth quarter. According to Nedbank, the latest figures suggest that the economy ended the year with modest growth after the third-quarter contraction.
It said the production side of the economy strengthened slightly, reflecting some improvement in the operating environment.
“Mining and manufacturing output benefited from less severe load-shedding,” Khosa said. During the fourth quarter, only 3,256GW was removed from the grid, compared with 5,942GW in the previous quarter and 6,021GW in the final quarter of 2022.
Consequently, mining production rose 3.9% year on year in October and 6.8% in November, while manufacturing production expanded 2.3% and 1.9%, respectively.
Nedbank expects GDP to grow 0.2% quarter on quarter in the fourth quarter. For the whole of 2023, the bank expects economic growth of 0.5%.
Khosa warned though that the growth outlook for 2024 remains murky. He said underlying economic conditions are likely to remain weak in the first half of the year, before improving moderately during the second half.
“We forecast GDP growth of 1% in 2024 before accelerating slightly to 1.5% in 2025. The market consensus forecasts are slightly more optimistic at 1.3% and 1.7% for 2024 and 2025, respectively,” he said.
The research report shows Nedbank expects inflation to be sticky at just above 5% in the first six months of the year before stabilising close to 4.5% over the second half.
Nedbank expects the monetary policy committee to start easing policy in July, reducing the repo and prime rates by a cumulative 75 basis points to 7.5% and 11%, respectively, by the end of 2024.
“The risk to our interest rate forecast is concentrated around the timing and pace of the anticipated easing,” Khosa said.
“The Reserve Bank could bring the first cut forward to May if the rand holds steady around the elections and the US starts its monetary easing earlier than most expect.”
Khosa added that should this scenario materialise, interest rates will probably be reduced by a more aggressive 100 basis points over the year.