Light at end of SA’s tunnel

MORE DAMAGING: COUNTRY’S LOW-GROWTH AND NO-GROWTH ENVIRONMENT

The economy is at ‘peak pessimism’, which is normally when things start improving.

While the latest surprise gross domestic product (GDP) data confirmed that South Africa is in a recession, the worst appears to be behind us. While we are unlikely to see any significant policy improvement until after the 2019 elections, we are heading in the right direction and the rate of change will gradually gain momentum.

South Africans probably had higher expectations from the economy, especially after this year’s political leadership change. But a lack of confidence (thus constrained spending and investment) has held us back. Our very low-growth and no-growth environment has been more damaging than the recession, as we have not been able to participate in the strong global growth environment.

I would therefore argue that we’ve been expecting too much too soon, especially as some factors are beyond policymakers’ control. The lower maize crop is putting the agricultural sector under pressure, there is a potential global trade war, mounting pressure on emerging markets impacting heavily on currencies, and the higher oil price is driving up local petrol prices. All this has contributed to current negative sentiment. We have been here before. South Africa experienced a recession last year; the 2016 fourth quarter GDP was reported as negative, followed by 2017’s negative first quarter. But, by the time the 2017 fourth quarter GDP data was released, the negative 2016 fourth quarter GDP data was revised away.

But significant policy uncertainty continues to weigh on the rand, severely worsened by the emerging markets crisis, with Turkey and Argentina at its epicentre.

However, emerging markets are unlikely to go into a full-blown crisis as we are already seeing some policy adjustments in Turkey and Argentina. Other emerging markets are in a better structural position regarding growth, interest rates, current account and fiscal balances, and inflation, than they were in 2013 when the US Fed announced its intention to scale back on quantitative easing. These variables are also significantly improved versus the 1998 emerging markets crisis.

I therefore expect a sharp recovery in the rand once emerging markets stabilise and some confidence returns. Should next year’s elections provide a clear victory for President Cyril Ramaphosa, he will have a strong mandate to implement policy change quickly and effectively, further strengthening the economy.

The rand is currently very cheap and foreign investors might see the benefit of investing in South Africa once there’s more stability and confidence. However, despite shorter-term strengthening, the rand will be weaker five years from now, as South Africa’s inflation is higher than that of our trading partners.

Policy uncertainty is eating away at the country’s ability to grow stronger sustainably. However, the Mining Charter and the land expropriation issue have seen some improvement.

Should we see significant improvement in government policies after the 2019 elections, it will likely lead to a sharp recovery in confidence. It won’t be possible to fix years of low growth and bad policy overnight, but, we seem to have started down the right track.

Johann Els is Old Mutual Investment Group head of economic research