Turbulent times lie ahead for SA’s struggling economy
Downward spiral continues Local assets abroad outstrip inflows for first time
THE South African economy is loosing pace and could follow in the footsteps of two of the Brics bloc of countries, Brazil and Russia, which are both already in recession, in 2016.
South Africa’s economy continued its downward spiral last year, with the bottom being reached last month when President Jacob Zuma took the economy closer to the brink of a junk credit rating after firing Nhlanhla Nene as finance minister in a move investors saw as undermining the country’s fiscal credibility.
Zuma removed Nene from his post after 19 months without giving reasons at the time and replaced him with a relatively unknown ANC MP, David van Rooyen.
Sanity prevailed four days later when Zuma replaced the little-known politician with previous finance minister Pravin Gordhan.
The shock move by Zuma came less than a week after credit rating agencies pushed the country closer to junk status, citing concerns over a sluggish economy and rising debt.
Lower rating
Fitch Ratings cut South Africa’s debt to BBB-, the lowest investment grade level, while Standard & Poor’s lowered the outlook on its equivalent rating to negative.
A junk rating would raise borrowing costs of government and parastals and cause an outflow of foreign capital.
Although the country is nowhere near a fiscal cliff, its net debt of 45 percent of gross domestic product (GDP), from 22 percent in 2008, has become a major concern to credit rating agencies.
The policy tightening by the US Federal Reserve in December, low commodity prices and China’s slowdown are to worsen the domestic economic situation this year.
South Africa’s economy remains structurally flawed, and even without a further downgrade it will remain in the doldrums this year.
Unemployment remains above 25 percent, while GDP growth has trended downwards each year since 2011. The consensus GDP forecast for 2016 is now 1.4 percent for growth, compared with 2.4 percent in July.
The current account deficit of 4.2 percent of GDP remains a major risk for the rand. South Africa is now at a crossroads, having to raise taxes or cut expenditure, or do both.
A budget deficit of R157 billion in the current financial year was announced in the mini-budget in October. The Treasury estimates the deficit will be contained to R145bn in 2016/17 and R152bn in 2017/18.
“If so, these figures should prompt concern, but they do not spell inevitable disaster,” Dennis Davies, the chairman of the Davis Tax Committee, wrote in the Financial Mail recently.
“These figures clearly indicate that unless expenditure is kept under tight control and revenue collection holds firm, the budget deficit will grow significantly.”
A budget deficit of R157bn in the current financial year was announced in the mini-budget.
The currency has roughly halved in value against its trade-weighted index over the past four-and-a-half years, falling much more against the Chinese yuan and the dollar.
Peter Attard Montalto, an emerging market analyst at Nomura International, said his narrative now was of a creditdriven currency moving towards sub-investment grade this year.
“There will likely be more volatility than in 2015, thanks to the Fed and the domestic political story. The Reserve Bank hikes likely will act as a break to a more disorderly move.”
He said that he has pencilled in R16 to the dollar at the end of 2016. THE VALUE of South African assets abroad outstripped foreign investment into the country for the first time on record – thanks to the rand’s slump.
The difference between South African foreign assets and liabilities swung to a surplus of R113 billion at the end of September from a deficit of R131bn at the end of June, the central bank said last month. That is the first positive reading since the bank began recording the data at the end of 1956.
“The volatility and decline in domestic and global equity markets as well as the significant decline in the end-ofperiod exchange rate of the rand resulted in a respective modest decline in foreign liabil- ities and a substantial increase in South Africa’s foreign assets,” the Reserve Bank said.
The rand plunged 25 percent against the dollar last year, the worst performance after Brazil’s real among major currencies tracked by Bloomberg.
The rand has been under pressure because of a slump in commodity prices, lacklustre economic growth and rising interest rates in the US. It fell to a record low this week of R16.2027 against the dollar.
“Emerging markets unfortunately remain on the back foot because you’ve got a strong US dollar that’s likely going to remain strong for most of this year, if not get even stronger,” Mohammed Nalla, the head of strategic research at Nedbank Group, said. – Bloomberg