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’.
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