South Africa’s biggest weakness – and what you can expect for the rest of 2018

News that South Africa’s economy has slumped into recession left the market reeling on Wednesday with the JSE All-Share index losing ground, while the rand gave up 3% to a stronger US dollar.

The economy shrunk by 0.7% quarter-on-quarter, following a revised 2.6% contraction in the first quarter of 2018, said StatsSA.

The downturn in the second quarter of 2018 was a result of a fall-off in activity in the agriculture, transport, trade, government and manufacturing industries.

Agriculture production fell by 29.2%, following a 33.6% slump in the first quarter. “This was largely driven by a decline in the production of field crops and horticultural products. Continued drought conditions in Western Cape and a severe hailstorm in Mpumalanga, resulting in extensive crop damage, also placed additional pressure on production in the second quarter,” StatsSA said.

It comes at the time when lawmakers are reviewing the nation’s constitution to make it possible to expropriate land without compensation.

President Cyril Ramaphosa’s party has embraced land expropriation without compensation as a means to achieve equality and racial justice. The African National Congress says the constitutional change should make it clear under what conditions farms can be taken.

However, according to the Agricultural Business Chamber, systemic bottlenecks that are hindering land reform include issues with beneficiary selection, legislative gaps, poor post-settlement support and poor implementation of existing policies, Bloomberg reported.

Liquidity

South Africa has one of the worst current-account deficits in the developing world, with a shortfall of 4.8% of GDP, Bloomberg reported.

It noted that optimism over president Ramaphosa’s economic plan has waned, while a worsening trade war, or a slowdown in China, may push the commodity-dependent economy further downhill.

The country’s main weakness is excess liquidity, Bloomberg said, citing Charles Robertson, the London-based global chief economist at Renaissance Capital Ltd.

South Africa has the highest foreign-exchange turnover-to-GDP ratio among emerging markets, he said, helping explain why South Africa is often at the forefront of developing-world routs.

And Arthur Kamp, economist at Sanlam Investments, has warned that low growth lies ahead, with future growth expectations now likely to be revised down.

Kamp said that the bounce in GDP in the second half of 2017 partly reflected South Africa’s improved terms of trade, which along with lower inflation boosted consumers’ purchasing power and spending.

However, in the first half of 2018 a deterioration in the terms of trade (due to higher oil import cost) and an increasing tax burden, including the 1% VAT rate hike in April 2018, weakened disposable income and households’ spending.

The 1.3% seasonally adjusted and annualised decrease in final household consumption expenditure in the second quarter of 2018 was the first outright decline in this expenditure category since the start of 2016, Kamp said.

“At the same time real private sector credit extension has remained palpably weak as the Reserve Bank has been limited to a shallow interest rate cutting cycle, partly due to tightening global financial conditions.

“Amidst these developments, given constrained profits growth, fixed investment spending and, hence, job creation, have disappointed. The 0.5% decrease in total gross fixed capital formation in the second quarter of 2018 follows a material fall of 3.4% in the preceding quarter,” the economist said.

Looking ahead

Looking ahead to the rest of 2018 and 2019, Kamp said it seems reasonable to expect growth momentum to lift somewhat as the impact of the drought in the Western Cape fades.

He pointed out that momentum in the Reserve Bank’s leading indicator continues to point to a better second half of the year.

“But, that said, the tightening of global financial conditions imply countries running macroeconomic imbalances will be placed under closer scrutiny by investors, especially if imbalances reflect a weak fiscal position.”

Kamp said that the rand is a useful shock absorber in this situation, but ultimately, the risk is higher domestic interest rates should the Reserve Bank observe that currency weakness is feeding through into substantially higher inflation expectations – especially given the bank’s view that monetary policy is still accommodative.

“On balance, the growth outlook into next year is modest at best. Given the outright decline in real GDP in both the first and second quarters, we (Sanlam) lower our average expected real GDP growth rate for 2018 to 0.75%,” Kamp said.

For the local market, “there seems to be no sign of halting the downtrend” for emerging-market assets, said Koji Fukaya, chief executive officer at FPG Securities Co in Tokyo.

“Investors have become more selective, and countries with negative news such as weak economic growth, weak external balances and high inflation face stronger sell-offs,” Fukaya told Bloomberg.

Consumers have been feeling the effects of a recessionary environment for some time already, as more are seeking help with managing their debt – to get by on a daily basis.

“The number of enquiries that have funnelled into our two national debt counselling entities, DebtBusters and Consumer Debt Help have risen by 30% over the past couple of months,” Ian Wason, CEO of Intelligent Debt Management (IDM).

Wason said that the majority of enquiries are from consumers who have reached a point where they don’t have enough money to cover their basic monthly expenses, and they are either exploring the possibility of taking out (more) credit, or are simply unable to keep up with their debt obligations and are therefore defaulting on their current credit repayments.

Read: Worst-case scenario: rand could hit R24 to the dollar by 2019