SA growth will con­tinue to dwin­dle

While lo­cal fi­nan­cial mar­kets have largely been able to shrug off the re­cent credit rat­ings down­grades, an­a­lysts be­lieve that the worst is yet to come and that it is ‘hard to see where growth will come from’.

Finweek English Edition - - THE WEEK - Edi­to­rial@fin­ Mariam Isa is a free­lance jour­nal­ist who came to SA in 2000 as chief fi­nan­cial cor­re­spon­dent for Reuters news agency af­ter work­ing in the Mid­dle East, the UK and Swe­den, cov­er­ing top­ics rang­ing from war to oil, as well as politics

south Africa’s fi­nan­cial mar­kets have taken the re­cent Cabi­net reshuf­fle and credit rat­ing down­grades in their stride thanks to global risk ap­petite, but the neg­a­tive im­pact on the econ­omy will be sig­nif­i­cant as wan­ing con­fi­dence takes a heavy toll on pri­vate in­vest­ment.

A grow­ing num­ber of econ­o­mists are re­vis­ing their growth fore­casts for this year down to lev­els well be­low 1% and warn that the out­look will worsen if po­lit­i­cal un­cer­tainty per­sists, prompt­ing fur­ther down­grades which would take the coun­try’s lo­cal cur­rency credit rat­ing be­low in­vest­ment grade sta­tus.

“Against the back­drop of re­cent ad­verse de­vel­op­ments, the burn­ing ques­tion is to what ex­tent should we down­scale the (eco­nomic) fore­cast,” Hugo Pien­aar, se­nior economist at the Bu­reau for Eco­nomic Re­search (BER), said at a brief­ing on 12 May.

At this stage, he pre­dicts that the econ­omy will ex­pand by just 0.6% this year, not much above last year’s 0.3% in­crease and well be­low an av­er­age an­nual es­ti­mate of 3.5% for sub-Sa­ha­ran Africa over each of the com­ing five years. Next year, he sees growth ris­ing to 1.3%.

Per­haps even more wor­ry­ingly, he be­lieves that there will be no in­crease in per capita in­come in SA over “the next num­ber of years” – which means that there will be no im­prove­ment in the lives of the coun­try’s poor ma­jor­ity.

But that’s just his base­line sce­nario, which as­sumes that SA re­tains in­vest­ment grade sta­tus for its long-term lo­cal cur­rency credit rat­ings from both Stan­dard & Poor’s and Moody’s.

This is more im­por­tant than the sovereign or for­eign cur­rency credit rat­ing as 90% of the gov­ern­ment’s debt is de­nom­i­nated in rand – and for­eign in­vestors hold more than a third of the to­tal.

Junk sta­tus for lo­cal cur­rency rat­ings from both those credit rat­ing agen­cies would force SA out of Citibank’s World Gov­ern­ment Bond In­dex (WGBI) and prompt a mas­sive sell-off of do­mes­tic debt, push­ing up of­fi­cial bor­row­ing costs and ab­sorb­ing money which would oth­er­wise have been used for spend­ing on in­fras­truc­ture or wel­fare. It would also hit the rand hard, ig­nit­ing do­mes­tic in­fla­tion and pos­si­bly even in­ter­est rate hikes – which would also stunt eco­nomic growth.

In that event, Pien­aar sees the econ­omy grow­ing by an av­er­age rate of 0.8% be­tween 2017 and 2019. Pri­vate sec­tor in­vest­ment – which ac­counts for around 70% of the coun­try’s to­tal, would con­tract by an av­er­age of 3.6% over each of those years, com­pared Emerg­ing mar­ket economist at No­mura with 0.6% un­der a base case sce­nario.

But Pien­aar thinks that junk sta­tus for SA’s lo­cal cur­rency rat­ings is un­likely for the next 12 months, al­though it could hap­pen over the next three years if the coun­try “doesn’t get its house in or­der”.

Speak­ing at the same event, No­mura emerg­ing mar­ket economist Peter At­tard Mon­talto was even more pes­simistic, say­ing he ex­pects the econ­omy to grow by just 0.2% this year. The sen­ti­ment shock would lead to an in­vest­ment shock, and at the core of it all was po­lit­i­cal un­cer­tainty, he said.

“It’s very hard to see where the growth will come from – it’s very hard to see in the medium run,” he said, adding that he be­lieved SA would drop out of the WGBI in a year’s time. Both Pien­aar and At­tard Mon­talto said at the event that too much hope was be­ing pinned on Deputy Pres­i­dent Cyril Ramaphosa win­ning the elec­tive con­fer­ence of the ANC in De­cem­ber and even in that event, ush­er­ing in the kinds of re­forms needed to kick­start the econ­omy.

Ramaphosa could be a “lame duck from day one” given that other se­nior fig­ures in the ANC would be likely to keep con­trol, At­tard Mon­talto said.

Po­lit­i­cal an­a­lyst Ralph Mathekga, au­thor of When Zuma Goes, said at the brief­ing that it would “take a sort of mir­a­cle for Cyril Ramaphosa to win the ANC pres­i­dency”.

But he be­lieves that talk about “rad­i­cal eco­nomic trans­for­ma­tion” from the rul­ing party – which has un­set­tled in­vestors – would re­main rhetoric. “The ANC has to be more pop­ulist be­cause of its de­clin­ing le­git­i­macy in the eyes of peo­ple. They have to start speak­ing the rad­i­cal lan­guage.”

None­the­less, it re­mains un­clear what the term means, other than us­ing the gov­ern­ment’s R500bn pro­cure­ment bud­get to more ef­fec­tively sup­port black busi­ness – which is not a new pol­icy.

“It is im­por­tant to note that we can­not and should not think state pro­cure­ment is the pri­mary, sole lever to de­velop black busi­ness,” fi­nance min­is­ter Malusi Gi­gaba said at a gala din­ner hosted by the Black Busi­ness Coun­cil on 15 May.

“We need both growth and trans­for­ma­tion [...] eco­nomic trans­for­ma­tion also in­volves changes in the struc­ture of the econ­omy and the in­sti­tu­tions which gov­ern it,” he said with­out elab­o­ra­tion.

Peter At­tard Mon­talto

Cyril Ramaphosa Deputy pres­i­dent

Ralph Mathekga Po­lit­i­cal an­a­lyst

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.