Shadow hangs over GDP growth spurt

• Economy accelerates 1.6% in third quarter • Analysts anxious over political instability

SA’s economic growth surprised in the third quarter, coming in well above market expectations and taking the economy back to levels seen in 2018, but analysts say that the findings of the Phala Phala report against President Cyril Ramaphosa may lead to political instability and increased uncertainty about the policy outlook.

After contracting 0.7% in the second quarter, GDP grew 1.6% in the third quarter, defying market expectations of a 0.6% increase and escaping a technical recession, which had been expected as a result of volatile monthly indicators and rolling power outages.

The increase in GDP means the economy is 1.2% above the level of economic activity that prevailed before the start of Covid and the largest it has been. It was driven mainly by the agriculture, finance, transport and manufacturing industries on the supply side.

On the demand side, GDP was boosted by higher exports and government consumption.

The data prompted a positive reaction from Ramaphosa, who has presided over an economy that had hardly grown, even before he took the helm in 2018. It came a day after the ANC’s national executive committee rallied behind him over the Phala Phala scandal.

“Given the condition of our economy, we have no room to be complacent, but we do have room to acknowledge that our economic recovery is in progress,” Ramaphosa said in a statement.

However, the political uncertainty arising from the report is likely to sap confidence among business leaders, who are already grappling with the fallout from the persistent power cuts and the underperforming rail network operator, Transnet.

Economists say the positive GDP numbers mean the economy will grow in excess of 2% this year but they warn that “one good print does not make a trend”, as 2022 has been a stopand-go year for the SA economy, with increasing evidence of households taking strain as a result of elevated costs for goods and services and higher interest rates.

“Labour strikes and sporadic power outages, together with fresh political uncertainty, do not point to a conducive business

environment,” Africa economist at Oxford Economics Jee-A van der Linde said.

Nedbank economist Crystal Huntley said even though the GDP numbers are surprisingly strong, the private sector is expected to scale back expansionary plans in response to weaker global and domestic demand conditions.

“The underlying investment environment will most likely remain unsupportive,” Huntley said. “Despite the encouraging reforms initiated in the energy sector, the country’s electricity shortage appears to be worsening, with Eskom crippled by a weak balance sheet, destructive vested interests, corruption and criminality.”

Huntley said other negative factors include that state-owned entities are in bad shape and the rail, road and port infrastructure continues to deteriorate.

“On top of these persistent concerns, the political landscape has also become much more uncertain, with the ‘farmgate’ cloud hanging over President Ramaphosa’s future in the runup to the 2024 general elections,” Huntley said.

Ramaphosa’s presidency has come under scrutiny after an independent panel investigating the handling of the theft of foreign exchange from his game farm in 2020 concluded that the president may have committed several violations.

The findings against the president have raised questions over his future, and analysts say these findings could influence policy and the political prospects of the ANC ahead of elections.

In a statement released on Tuesday, Fitch Ratings said the Phala Phala saga and Ramaphosa’s possible impeachment could further weigh on nearterm investment prospects and weaken business sentiment.

Fitch said that even though it still sees broad policy continuity as the most likely scenario, “the scandal may further damage the reputation of the ANC”.

“If the president were to resign, we believe that it is more likely that a potential successor would emerge from the president’s moderate wing of the ANC rather than the Zumalinked radical economic transformation faction, which advocates more populist approaches,” Fitch said.

The agency said the outlook for public finances, and for the government’s debt trajectory specifically, remains an important rating sensitivity for SA and “should the government respond to the scandal by raising public spending beyond our expectations, resulting in a sustained widening of the fiscal deficit that points to a sharper rise in the government debtGDP trajectory, this could lead to re-emergence of downward pressure on the rating”.

Fitch said its baseline assumption remains that the consolidated fiscal deficit will stand at 5.1% of GDP in the fiscal year ending March 2023 and stay close to that level in the following two years.

This compares with the government forecast that the deficit will decline to 3.9% of GDP in the financial year 2024/2025, from 4.9% in the financial year 2022/2023, with the difference due to Fitch forecasting weaker government revenue and higher payroll spending.

FITCH RATINGS SAID THE POSSIBLE IMPEACHMENT COULD WEIGH ON NEAR-TERM INVESTMENT PROSPECTS