SA still deep in the woods

MUCH WORK LIES AHEAD TO GET TURN-AROUND We may have enjoyed a measure of reprieve on our ratings last week, but that doesn’t mean we can enjoy the luxury of relaxing.

South Africa escaped a downgrade to subinvestment grade status on Friday, but S&P Global Ratings’ decision to leave unchanged our foreign currency rating does not mean we are out of the woods.

Fortunately, although economic growth is still not expected to shoot the lights out in 2017, it may be considerably higher next year than in 2016.

Lesiba Mothata, chief economist at Investment Solutions, says South Africans are amenable to the feedback from ratings agencies and the enormous initial effort by business, government and labour to avert a downgrade to junk status may create a new impetus.

However, markets are likely to face increased political noise as South Africa gears up for the ANC electoral conference in 2017.

Although various reform measures have been mooted, including reforms at state-owned enterprises and in the labour market, progress has been lacking.

Mothata says implementation is still weak. National Treasury appears visibly frustrated as it has done a lot of work, but it still needs to be signed off.

He believes South Africa should take its cue from Mauritius and prioritise economic zones around cities, introduce low corporate taxes and focus on small and medium enterprises to get the economy going.

He expects economic growth to accelerate from 0.6% this year to 1.6% in 2017 and 2% in 2018. This is broadly in line with National Treasury’s own expectation of 0.5% in 2016 and 1.3% and 2% in 2017 and 2018 respectively.

Although the downturn in the commodity cycle has been a tough pill to swallow, exports are expected to improve. There is still a relatively strong demand for commodities from China among others, Mothata says.

At the same time, the manufacturing and mining sectors seem to be recovering.

With food price inflation expected to slow as drought conditions improve, consumer price inflation could decelerate to around 5% by the middle of next year. There is also a possibility of further rand strength.

Markets are likely to face increased political noise as South Africa gears up for the ANC electoral conference in 2017.

Mothata says in such an environment, the South African Reserve Bank could ease policy, but would drop interest rates by 25 basis points in 2017 “at best”.

Although he expects the US Federal Reserve to hike interest rates next week, monetary policy in the US, which has played a role in domestic policy setting over the past 24 months, will move to the background as inflation slows. As a result, domestic factors will increasingly be at the centre of the Monetary Policy Committee’s decisions.

He says despite higher bond yields in the US and fears that fiscal spending could prove inflationary, the interest rate hike in the US has long been expected.