COULD IT BE AN EX­TENDED RE­CES­SION?

Much de­pends on po­lit­i­cal de­vel­op­ments and their im­pact on SA’s vul­ner­a­ble credit rat­ings, say econ­o­mists

CityPress - - Business & Tenders - JUSTIN BROWN justin.brown@city­press.co.za

South Africa faces the prospect of an ex­tended re­ces­sion if more of the coun­try’s credit rat­ings are down­graded to “junk” sta­tus or there are fur­ther po­lit­i­cal shocks.

It emerged this week that South Africa has moved into its first re­ces­sion since 2009. Since 1961, the coun­try has been in re­ces­sion eight times.

The data from the first month of the sec­ond quar­ter, April, show that the econ­omy re­mains weak.

“The first ac­tiv­ity data for the sec­ond quar­ter were pretty down­beat ... There is lit­tle sign of a sig­nif­i­cant re­cov­ery,” John Ash­bourne, Africa econ­o­mist for Lon­don-based Cap­i­tal Eco­nomics, wrote in a note this week.

Min­ing fig­ures for April were worse than ex­pected and the man­u­fac­tur­ing sec­tor per­formed very poorly.

Ash­bourne said a fur­ther in­di­ca­tor of the state of the econ­omy will be ev­i­dent when re­tail sales fig­ures for April are re­leased on Wed­nes­day.

“This fig­ure will be a cru­cial sign of whether or not things have im­proved,” Cap­i­tal Eco­nomics said.

A re­ces­sion is de­fined as two con­sec­u­tive quar­ters of neg­a­tive eco­nomic growth; a sit­u­a­tion South Africa finds it­self in af­ter the lo­cal econ­omy con­tracted by 0.3% in the fi­nal quar­ter of 2016 and by 0.7% in the first quar­ter of 2016.

The re­ces­sion will weaken tax rev­enue, which will in­crease the gov­ern­ment’s bud­get deficit and could see state debt rise, plac­ing the coun­try’s credit rat­ing un­der more pres­sure.

The con­trac­tion of the econ­omy has been ac­com­pa­nied by a rise in the of­fi­cial rate of un­em­ploy­ment, which hit 27.7% in the first quar­ter of the year. The on­set of the re­ces­sion could see the loss of fur­ther jobs.

The prospect of fur­ther eco­nomic con­trac­tion could be­come a re­al­ity if more of South Africa’s lo­cal cur­rency credit rat­ings are down­graded to junk sta­tus.

This could cause bil­lions of rands to exit the coun­try as in­ter­na­tional in­vestors are forced to sell their lo­cal hold­ings due to man­dates that re­quire their money to be in­vested in in­vest­ment-grade as­sets.

Nicky Weimar, a Ned­bank econ­o­mist, said this week dur­ing a con­fer­ence that such a sit­u­a­tion could pre­cip­i­tate R100 bil­lion in forced bond sales.

“This would com­pletely un­set­tle the econ­omy. Eco­nomic growth would come un­der pres­sure and the re­ces­sion would per­sist.”

On the other hand, Jef­frey Schultz, a BNP Paribas econ­o­mist, said he ex­pected the lat­est re­ces­sion to last only two quar­ters, partly due to the re­cov­ery in the man­u­fac­tur­ing and min­ing sec­tors.

Schultz said the lack of growth would re­main a “big credit rat­ing” risk.

Nazrien Kader, head of Deloitte Africa Tax Ser­vices, said a re­ces­sion would re­sult in less con­sump­tion, which would in turn slow growth in value-added tax (VAT) rev­enue, lead­ing to busi­nesses pay­ing their staff smaller or no bonuses, hurt­ing tax col­lec­tions.

Na­tional Trea­sury’s key tar­get is to re­duce the bud­get deficit from an es­ti­mated 3.4% of GDP in Fe­bru­ary 2017 to 2.6% by Fe­bru­ary 2020.

The gov­ern­ment could be forced to ei­ther cut ex­pen­di­ture or raise taxes next year to meet its fis­cal tar­gets.

How­ever, Kader said rais­ing taxes amid a re­ces­sion would be the “worst pos­si­ble idea” and the gov­ern­ment should rather cut costs and re­duce waste­ful ex­pen­di­ture.

Sandy Mc­Gre­gor, port­fo­lio man­ager at Al­lan Gray, said it would be very dif­fi­cult for the gov­ern­ment to meet its fis­cal tar­gets as the econ­omy wouldn’t be grow­ing for the next 12 to 24 months.

Gov­ern­ment debt, which stands at R2.2 tril­lion, was likely to rise, he added.

Ire­land and Es­to­nia were ex­am­ples of coun­tries that went into re­ces­sion and cut ex­pen­di­ture and got out of their slumps fairly quickly, while France was a coun­try that raised taxes in re­sponse to a re­ces­sion, Mc­Gre­gor said.

Ja­son Mus­cat, an FNB se­nior eco­nomic an­a­lyst, said that the weak­nesses in the first-quar­ter GDP fig­ures were “in­cred­i­bly broad-based, with only the agri­cul­ture and min­ing sec­tors ex­pand­ing”.

“Our con­cern is that the num­bers are back­ward­look­ing, and don’t re­flect the con­fi­dence shock we ex­pect post the Cab­i­net reshuf­fle and credit down­grades,” he added.

On March 30, Pres­i­dent Ja­cob Zuma reshuf­fled his Cab­i­net and fired fi­nance min­is­ter Pravin Gord­han and re­placed him with Malusi Gi­gaba.

The on­set of the re­ces­sion comes as Moody’s In­vestors Ser­vice was set to com­plete its re­view of South Africa’s credit rat­ing late on Fri­day.

In April, Moody’s warned that it could cut South Africa’s rat­ing if lo­cal growth weak­ened or there were fur­ther do­mes­tic or ex­ter­nal shocks to growth.

Mike Brown, Ned­bank CEO, said that South Africa was fac­ing its worst time since the early 1990s.

Ned­bank econ­o­mist Weimar said this week that the great­est dam­age had been wrought on the lo­cal econ­omy in re­cent times by “se­ri­ous po­lit­i­cal mis­takes” and an on­go­ing news flow in­di­cat­ing cor­rup­tion in gov­ern­ment.

“Has the dark­est hour passed? Is the first quar­ter of 2017 the low point of the cy­cle? Much de­pends on po­lit­i­cal de­vel­op­ments and their im­pact on South Africa’s credit rat­ings. Ex­pect more po­lit­i­cal tur­moil.

“Na­tional Trea­sury needs to do its job to avoid fur­ther dam­age,” Weimar said.

The do­mes­tic po­lit­i­cal land­scape might de­te­ri­o­rate fur­ther and fis­cal con­di­tions might weaken un­der Gi­gaba, Weimar said.

Trea­sury said the re­ces­sion would put its fis­cal po­si­tion at risk and un­der­mine so­cial ser­vice de­liv­ery.

Weimar said the gov­ern­ment needed to re­store con­fi­dence and faith in its poli­cies.

Cor­rup­tion needs to be tack­led and the gov­er­nance of state-owned en­ter­prises fixed.

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