THE POLL FACTOR
Elections will be key to economy
● The sixth general elections since 1994, which are scheduled for May, could emerge as a swing factor for economic growth this year, while drought and electricity supply challenges also loom large.
Growth for 2018 is likely to be 0.7% when the data is released later this quarter, reflecting the six-month recession in the first half of the year. The economy is expected to grow only marginally this year.
Annabel Bishop, chief economist at Investec, said: “Political parties are seeking increased leverage in a number of areas including populist policies, racial divisions, property rights and socialism. If the rhetoric becomes disruptive, political uncertainty will increase ahead of the elections, likely further undermining business confidence, and thus growth prospects.”
Already confidence is looking shaky. A leading gauge of business confidence — the Rand Merchant Bank/Bureau for Economic Research business confidence index — dropped to 34 in the fourth quarter of 2018, indicating possible contraction in business activity.
This is below the neutral mark of 50, which separates expansion and contraction. The drop in the index also indicates potentially weaker fixed investment in the first half of 2019.
Analysts say investors are likely to seek clarity on two fronts amid the election hype: the government’s contentious plan to expropriate land without compensation, and any shift in the power balance following the polls. Both will have an impact on investor sentiment, business confidence and the policy agenda.
The investment drive initiated by President Cyril Ramaphosa last year could have a significant impact on economic growth if all the promises are kept. Yet the $50bn (about R725bn) pledged in investments is unlikely to materialise until after the elections, as investors have adopted a wait-and-see attitude.
Elize Kruger, a senior economist at NKC African Economics, said: “Assuming that political shifts within the ANC move policy in a more business-friendly direction, we expect economic growth to gradually gain momentum.”
Growth forecasts for 2019 indicate economic expansion, but it will be inadequate to curb high unemployment. The National Treasury’s growth estimate of 1.7% and the Reserve Bank’s estimate of 1.9% indicate how weak growth is likely to be.
The intractable issues at some stateowned entities (SOEs) will continue to cast a shadow on the economy this year.
Analysts believe that Eskom is the biggest risk to market perception and confidence for SA in the coming year.
Bishop said: “SOEs remain a key concern, especially Eskom. [It] has been riddled with a number of issues including debt of more than R100bn; almost 1,000 corruption cases against employees at all levels in the company; supply constraints for coal needed to generate electricity that led to a bout of loadshedding towards the end of 2018; [and] constant changes in management.”
Given the parlous state of Eskom’s financial position, load-shedding could persist into 2019 and if it was as extreme as in early 2008, “GDP for Q1 2019 could see growth cut by as much as a third to a half”, said Bishop.
Consumer-driven consumption, which contributes 60% to GDP but remains constrained due in part to higher taxes, is unlikely to lift growth substantially in the short term. But Ramaphosa’s drive to root out corruption in the public sector, among other interventions, has triggered a mild recovery in consumer confidence.
Kruger said: “If it is sustained, confidence should lift spending by both households and businesses in the medium term.”
Consumer inflation pressure has subsided following lower international oil prices in November and a substantial drop in domestic fuel prices.
However, food inflation may come under pressure.
Low rainfall in the western Free State and North West, where two-thirds of SA’s white maize is produced, has resulted in less than 20% of the expected 2.4-million hectares actually being planted.
The agriculture sector grew 6.5% in the third quarter of 2018, helping the economy to lift out of recession, but its contribution to GDP is volatile.
Dawie Maree, head of information and marketing at FNB Agriculture, said adverse weather conditions may push up maize prices but not dramatically, given the large carry-over stocks that have been built up thanks to record maize crops in the past two seasons. Maree said prolonged drought would affect grazing conditions for red meat and for wool producers. An additional concern for the agricultural sector is currency volatility.
Corné Louw, senior economist at Grain SA, said recent rand swings could hamper the sector as input and commodity prices are directly derived from international prices. Volatility “makes decision-making very difficult for farmers”, Louw said.
In 2018, SA’s currency was the fourthworst performer against the dollar after the Argentine peso, Turkish lira and Russian rouble.
The outlook for manufacturing, which also helped lift the economy out of recession last year, is also uncertain.
Philippa Rodseth, executive director of the Manufacturing Circle, said: “If we can grow demand and deal with our supply-side issues then we can start to arrest the decline, stabilise and increase our production and shifts, invest more and create more jobs.”
But another unknown factor for the job market is the impact of the new national minimum wage of R20 an hour, or R3,500 a month, which came into effect on January 1.
Peter Worthington, a senior economist at Absa, said: “As regards the impact of the minimum wage, the degree of enforcement, the ease with which struggling businesses can obtain exemptions, and the pace of the annual [increase in the wage] are all going to be key. I’m keeping an open mind.”
International factors will loom large this year if investors in emerging markets retreat to the safe haven of the dollar. Uncertainty over trade tensions between the US and China have yet to be resolved and are a drag on global trade and economic growth.
The International Monetary Fund late last year revised down its global growth forecast for 2018 and 2019 to 3.7% from a previous forecast of 3.9% for both years.
The Organisation for Economic Co-operation and Development forecast that a fullblown trade war could result in economic uncertainty and shave 0.8% off global GDP by 2021.