South Africa Politics To Trigger Downgrade–Part 2

Economy Remains Weak, IMF Forecast Down

South Africa’s economy remains weak. The GDP growth forecast by the IMF is now at 0.1% in 2016, down from 1.3% in 2015. Growth, according to the IMF, is seen to be picking up to 0.8% in 2017 and 2.7% in 2018. GDP inched up 0.6% y/y in Q2, after a -0.1% year over year reading in in the first quarter. So far, third quarter indications suggest that the slowdown is carrying over into the second half of this year.

Price pressures in South Africa are continuing to ease. This is the lowest rate since December and back within the 3-6% target range. This should allow the South African Reserve Bank (SARB) to keep rates steady for now. However, the rand is the “wild card” and recent weakness (if it persists) suggests upside risks to inflation ahead.

The central bank is due to meet next on November 24 and no change is expected. The SARB has been on hold since the last 25 bp hike back in March, at which it took the policy rate to the current 7.0%. “Monetary easing is unlikely to be contemplated until we are well into 2017,” Win Thin, global head of emerging market currency strategy said.

Gordhan’s Prudent Policymaking

Fiscal policy has remained prudent under Gordhan, but that may change, Thin explainsGordhan is scheduled to present his Medium Term Budget Policy Statement to parliament on October 26, but this has been thrown into a new level of confusion by these latest reports of Gordhan being charged. At the core of this ongoing conflict is Zuma’s reluctance for further austerity measures. “Whatever the outcome of the current investigations, it’s clear that Gordhan’s hands are likely to be tied and that further austerity is unlikely,” says Thin.

Foreign reserves in the country have risen modestly. At $47.25 billion in September, they cover roughly four months of import and are only about 1.25 times larger than short-term external debt. Foreign direct investment (FDI) remains low and so as the current account deficit widens, South Africa will have to rely more on hot money flows to finance it.

The IMF estimates that the budget deficit was around -4% of GDP in 2015. This figure is expected to narrow slightly to around -3.5% this year and -3% in 2017. South Africa’s economy is barely expanding, so this could be an optimistic estimate. Finance Minister Pravin Gordhan has announced several rounds of spending cuts in the country. “But we feel that pro-cyclical fiscal policy rarely works. Revenue growth is slowing, pushing the 12-month budget deficit up to -ZAR172 bln in August, the highest since January 2015 and around -4% of GDP,” said Thin.

The external accounts have improved somewhat but also bear watching. Lower commodity and gold prices have hurt exports for South Africa, but low energy prices and sluggish growth have on the other hand, have helped reduce imports. The current account gap was around -4.5% of GDP in both 2014 and 2015, but is expected by the IMF to narrow to -3.3% in 2016 and -3.2% in 2017.  “With oil and energy prices on the rise, we see upside risks to the external imbalances,” Thin said.

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