DARE WE HOPE FOR RECOVERY?
SA is an echo chamber where bad news is amplified and positive developments are ignored. Are we becoming too cynical about the country’s slowly improving prospects?
The trend in recent years has been for economists to revise down their SA growth forecasts frequently, and ratings agencies to downgrade the country’s credit ratings consistently. With the government slow to reform, a deep-seated pessimism has taken hold.
But now, despite SA’s multiple challenges, some of the country’s most bearish economists are questioning whether the Sandton consensus has become too cynical.
In December last year, the Reuters consensus was that the SA economy would grow by 2.8% in 2022. By March, that had dropped to 1.9% — understandably, given the worsening inflation and interest rate outlook and the outbreak of war in Ukraine. Only, there have been a few positive domestic developments too, and these cannot be completely discounted.
The most significant is that SA achieved an almost R200bn revenue overrun in the past fiscal year (relative to the February 2021 estimate), thanks to the economic rebound from Covid, fuelled by sky-high commodity prices. Also positive is that it was aided by better collection efficiency at the SA Revenue Service, which is recovering from its erosion under state capture.
This, together with Stats SA’s statistical rebasing of the economy last year, which raised SA’s nominal GDP by 11%, has dramatically improved SA’s fiscal position. Instead of SA exiting the pandemic with an expected debt ratio of about 80% of GDP, the ratio has fallen to just below 70%.
Ratings agency Moody’s has taken this improvement, together with the National Treasury’s continued exercise of fiscal restraint, to mean that SA will now succeed in stabilising the debt ratio over time.
Last week it consequently upgraded SA’s credit rating outlook from negative to stable, affirming its Ba2 rating (two notches deep into junk status). Fitch shifted SA’s rating outlook from negative to stable in December. This puts SA’s ratings on a stable outlook with all three of the main ratings agencies.
Also cheering is the greater flexibility being shown by the state in granting the economy a temporary respite from fuel price hikes, along with the successful conclusion of the spectrum auction and the moves Transnet is making towards granting third-party rail access and private involvement in its ports.
Citi economist Gina Schoeman is hopeful that if Transnet’s rail and port reforms can improve efficiencies, and the commodity boom runs harder for longer, SA may be able to lift export volumes. This, she says, could underpin a growth rate of above 2%.
Similarly, Schoeman notes that as more private self-generation energy projects take off, the burden on Eskom should drop, potentially leading to less load-shedding.
Moreover, once the private sector is allowed to participate in the provision of services that were the exclusive domain of state monopolies, resulting in greater economic efficiency, it would “prove the concept” of private sector-led growth, making it harder to reverse this policy shift.
Though Schoeman remains far from bullish, she says the odds of SA growing above 2% this year have improved and, while she is not yet ready to raise her 1.9% forecast for 2022, she is at least thinking about doing so.
BNP Paribas economist Jeffrey Schultz is also reluctant to revise up his sub-consensus 1.3% GDP growth estimate for this year, though he feels “there is rightly cause for optimism”.
“It’s clear that the narrative towards SA is gradually changing through the culmination of spectrum auctioning, bid window 6 being rolled out [last] week and [the] National Ports Authority making louder noises regarding crowding in the private sector,” he says. “The political economy [also] continues to move in the right direction.”
But is it enough to meaningfully move the needle on SA’s near-term growth trajectory? “Probably not,” says Schultz. “Realistically, we believe SA will only be in a position to boost its current sub-1% potential growth rate from 2024 onwards.”
However, he says: “It’s easy to forget just how far we have come in the past three years under new political leadership, which sadly has been marred by deteriorating external conditions and messy geopolitics. If we strip out all the noise, the ‘delta’ is undeniably positive we may just have to wait a bit longer for it to show up in the numbers.”
Last week, the Bureau for Economic Research released a report assessing SA’s progress towards achieving its development objectives as at the end of 2021.
It’s a mixed bag: the country improved in 24 areas and regressed in 33. But many of the outcomes reflect the negative impact of the pandemic over the past two years, including a rise in unemployment and a decline in tourism. Perceptions about the rule of law and government effectiveness also declined, as did fixed investment and growth in exports and regional trade.
There were, however, also some positive developments. SA’s social protection system allowed a quick response to households affected by the pandemic; energy reforms signalled greater political commitment to SA’s energy transition, creating a more attractive investment environment; agriculture performed well; and economic activity is close to recovering to pre-pandemic levels.
Another of SA’s leading bears, Intellidex head of capital markets research Peter Attard Montalto, says he is “quite happy” forecasting 2.1% growth this year, rising to 2.3% in 2023, and that the consensus is too low — at least for the next two years.
Last week, Investec chief economist Annabel Bishop raised the odds of her relatively positive base, or expected, case occurring by three percentage points to 51% and lowered the odds of her more negative scenario (in which SA falls four notches deep into junk status) by the same number of percentage points to 40%.
This is the widest the gap has been between these two scenarios since the height of “Ramaphoria” in early 2018, and it’s the first time Bishop’s base case has been at or above 50% in almost a decade. In the final quarter of 2020, she attached odds of 44% each to SA realising either of these two scenarios. That’s quite a shift in sentiment in the space of a year.
Her base case is that SA will not experience further ratings downgrades and that debt stabilisation will occur. Growth will rise from 1.8% this year to 2% in 2023 and 2.2% in 2024, before climbing steadily to 2.8% by 2027.
Of course, fears about SA’s long-term sustainability haven’t gone away. Eskom is still creaking, and the pace of reform has proved too tentative to unleash animal spirits across the economy.
A deeper reading of Moody’s ratings review reveals that it has upgraded SA’s outlook purely because of the improvement in its fiscal numbers. SA’s economic fundamentals, including its economic strength, have not materially changed, nor have its institutional strength, governance or susceptibility to event risks.
In short, the Moody’s review makes it clear that SA’s rating remains consistent with junk status, and hints that it is hard to see the country moving back to investment grade.
For instance, it notes that SA’s “growth remains structurally weak” and its state-owned enterprises “very weak”, and that constraints emanating from a malfunctioning labour market and decaying infrastructure prevent an improvement in living standards, fuelling social risk.
Moody’s expects these constraints to persist and forecasts GDP growth of only about 1.5% in the medium term. Only, such low trend growth is hardly suggestive of a stable long-term credit trajectory.
Attard Montalto makes a similar point, referring to himself as a “bear” even though he is above consensus on short-term growth. In the medium term, he sees growth crashing back to 1.8% of GDP.
“I am still negative with my [growth] numbers because I don’t see them resulting in lower unemployment or lower inequality, [nor] much extra revenue for the National Treasury,” he explains. “As such, social stability and political risk still abounds with these numbers.”
It is also clear from Fitch’s December ratings review that it changed SA’s outlook to stable despite taking a less sanguine view of SA’s fiscal improvement than Moody’s.
Though it acknowledges that SA’s debt metrics have improved, Fitch still expects the debt ratio to remain on an upward trajectory and fiscal deficits to remain high, warning that “significant upward risks remain”.
Like Moody’s, Fitch continues to see weak trend growth as a key credit weakness. It puts SA’s long-term potential growth rate at just 1.1% despite its near-term real GDP growth forecast of 2% in 2022 and 2.4% in 2023.
“Low growth reflects deep-rooted labour market problems, including skill mismatches and the fractious relationship between social partners, but also very weak investment, exacerbated by electricity shortages,” says Fitch.
While it concedes that significant private energy investment is on the cards, it fears it could take several years to stabilise SA’s electricity supply, saying “[the] reforms now under way, including regulation of network industries and measures to boost investment, are moving only slowly and are insufficient to change the growth path significantly”.
Both Moody’s and Fitch need to see an improvement in SA’s growth prospects and progress on fiscal consolidation before they will upgrade SA’s credit rating.
It’s easy to forget just how far we have come in the past three years under new political leadership, which sadly has been marred by deteriorating external conditions and messy geopolitics. If we strip out all the noise, the ‘delta’ is undeniably positive
Jeffrey Schultz