Pri­vate sec­tor’s big con­tri­bu­tion to cap­i­tal ex­pen­di­ture ex­pected to con­tinue this year

Pretoria News - - BUSINESS REPORT - ANNABEL BISHOP Annabel Bishop is the chief econ­o­mist at In­vestec.

SOUTH Africa is at risk of see­ing an eco­nomic growth rate of be­low 1 per­cent year-on-year (y/y) this year as a num­ber of struc­tural prob­lems re­main un­re­solved.

This comes af­ter a growth rate of likely-to-be be­low 0.5 per­cent y/y in 2019, not least due to sub­stan­tial, pe­ri­odic losses of elec­tric­ity sup­ply.

Not all ar­eas of South Africa’s econ­omy per­formed poorly in 2019, the pri­vate sec­tor made a sub­stan­tial con­tri­bu­tion to cap­i­tal ex­pen­di­ture and is ex­pected to do so in 2020, pro­vid­ing sup­port to gross do­mes­tic prod­uct (GDP). The pri­vate sec­tor ac­counts for 70 per­cent of fixed in­vest­ment in SA, while gov­ern­ment ac­counts for only 16 per­cent and pub­lic cor­po­ra­tions be­low 15 per­cent. Pri­vate business en­ter­prises saw cap­i­tal ex­pen­di­ture growth rates of 15.8 per­cent quar­ter-on-quar­ter sea­son­ally ad­justed an­nu­alised (q-qsaa) in the sec­ond quar­ter of 2019, and 10.8 per­cent q-qsaa in the third quar­ter, with a pos­i­tive out turn likely for pri­vate sec­tor cor­po­rates’ fixed in­vest­ment growth in fourth quar­ter of 2019.

How­ever, the gov­ern­ment likely re­turned nega­tive rates on fixed in­vest­ment in 2019, with pub­lic sec­tor capex down -16.3 per­cent q-qsaa in the sec­ond quar­ter of 2019 and -17.8 per­cent q-qsaa in the third quar­ter of 2019, af­ter con­tract­ing by -2.1 per­cent q-qsaa in the first quar­ter of 2019. 2020 would see fur­ther con­trac­tion in gov­ern­ment fixed in­vest­ment if projects bud­geted for do not go ahead, while this is also an area that risks bud­get cuts as gov­ern­ment seeks to re­duce ex­pen­di­ture to avoid a Moody’s credit rat­ing down­grade.

Moody’s is sched­uled to de­liver its coun­try re­view on March 27, with the Bud­get in Fe­bru­ary.

The agency has al­ready placed SA’s long-term sovereign debt on a nega­tive out­look to­wards the end of last year, in­di­cat­ing that it plans to down­grade SA to sub-in­vest­ment grade, from its rat­ing on the last rung of in­vest­ment grade, if SA does not make the nec­es­sary changes that would al­low its rat­ing to re­turn to sta­ble. Specif­i­cally Moody’s has said SA would avoid a down­grade “if the gov­ern­ment’s ef­forts to rein in spend­ing, im­prove tax com­pli­ance and lift po­ten­tial growth be­came in­creas­ingly likely to suc­cess­fully sta­bilise debt ra­tios”.

National Trea­sury has put for­ward key ar­eas where ex­pen­di­ture cuts need to be made to con­sol­i­date the gov­ern­ment’s fi­nances ma­te­ri­ally, which specif­i­cally in­cludes cut­ting above in­fla­tion civil ser­vants’ re­mu­ner­a­tion growth. If un­suc­cess­ful SA will likely see a rat­ing down­grade.

Low in­fla­tion does not sig­nal an in­ter­est rate cut in the first quar­ter of 2020 as the po­ten­tial for a rat­ing down­grade hangs over SA.

Moody’s ex­pects SA’s GDP at 1 per­cent y/y to 1.5 per­cent y/y, with around 0.8 per­cent y/y likely in­stead this year, while SA risks po­ten­tial GDP growth con­tin­u­ing to drop to 0 per­cent, and then be­low, without dras­tic ac­tion to re­pair the pro­duc­tiv­ity of pub­lic ser­vices and in­fra­struc­ture, in­clud­ing con­sis­tent elec­tric­ity sup­ply.

A 25 ba­sis point in­ter­est rate cut will be­come in­creas­ingly likely if SA’s Moody’s rat­ing out­look re­turns to sta­ble.

How­ever, the prob­a­bil­ity of SA avoid­ing a Moody’s down­grade has di­min­ished, and could fall fur­ther, re­duc­ing the prospects for stronger eco­nomic growth, fis­cal ac­com­mo­da­tion, a more sup­port­ive bor­row­ing en­vi­ron­ment and sus­tained eco­nomic growth of above 3 per­cent in the medium-term.

Con­sump­tion ex­pen­di­ture by gov­ern­ment grew in each of the first three quarters avail­able for 2019, while gov­ern­ment debt lev­els rose no­tably.

Bor­row­ings have been used to top up cur­rent ex­pen­di­ture, re­sult­ing in the cur­rent fis­cal bal­ance be­ing in deficit (dif­fer­ence be­tween rev­enue and cur­rent ex­pen­di­ture, and cur­rent ex­pen­di­ture in­cludes civil ser­vants com­pen­sa­tion). The gov­ern­ment con­se­quently con­tin­ued to make a nega­tive con­tri­bu­tion to national sav­ings, and con­tin­ued to bor­row the bulk of its new is­suance of debt in the lo­cal mar­ket. Ex­pen­di­ture cuts in gov­ern­ment fixed in­vest­ment in­stead, would de­tract from eco­nomic growth, with pre­vi­ously un­spent funds al­lo­cated to gov­ern­ment in­fra­struc­ture also hold­ing the po­ten­tial to con­trib­ute mean­ing­fully to eco­nomic ac­tiv­ity in 2020 if spent.

SA’s growth has also been af­flicted by the slowing global econ­omy. The US is ex­pected to sign a sub­stan­tial trade deal with China this year, post the first phase trade deal in Jan­uary, al­low­ing global growth to im­prove.

How­ever, a de­clin­ing like­li­hood of this would see slowing global growth, where SA’s eco­nomic per­for­mance has al­ready been im­pacted by weak­en­ing global de­mand, along with pol­icy un­cer­tainty do­mes­ti­cally and par­tic­u­larly the fail­ure to im­ple­ment the struc­tural re­forms needed this decade. The rand will con­tinue to be volatile, driven by global events, and struc­turally weak­ened by SA’s poor fun­da­men­tals.

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