South Africa to rebound in 2020? Not likely

To revive South Africa’s economic growth will require fiscal credibility from Treasury, says Alexander Forbes.

Speaking to journalists at its head office in Sandton On Thursday (23 January), the investment firm noted that the country’s economic growth has stagnated in recent years due to several persistent macroeconomic and structural challenges.

With continued power outages, threats of further credit rating downgrades, climate change, and stubbornly high unemployment, prospects of a rebound in 2020 are looking increasingly challenging, it said.

Alexander Forbes said that structural reforms are required as a matter of urgency, in order to re-ignite the economy, which is set to grow below 1% in 2020. The company said that fiscal credibility has been lost. It said that National Treasury has not met targets it set itself, which has put the country in the firing line for a sovereign credit rating downgrade.

It noted that it takes countries years to recover from junk status, or sub investment grade. It added that only a few countries have been able to recover from sub investment grade, by implementing radical fiscal change.

South Africa does not have a revenue problem, Alexander Forbes said. It has a spending problem.

Finance Minister Tito Mboweni has made it clear the state wage bill has to be trimmed, and has warned that South Africa’s government debt could hit more than 70% of GDP amid constant bailouts of state owned entities.

Spending has been the problem in South Africa, Isaah Mhlanga chief economist of Alexander Forbes said. Real spending has increased well above inflation, he pointed out.

The pace of structural reforms has been too slow, Mhlanga said, which he believes will lead to a downgrade by Moody’s.

“Domestic constraints remain binding. Electricity shortages, a weak consumer demand, and a constrained fiscus all contribute to weak economic growth outlook of about 1.0% this year and 1.5% in 2021.”

To improve this growth outlook, three things are needed:

1. Re-establish fiscal credibility: This requires National Treasury to achieve the budget targets they set.
2. Implement structural economic reforms: The required structural reforms have been discussed at length – what remains is faster implementation, which has marginally improved so far.
3. Attract fixed investment: The success of implementing economic reforms will attract fixed investment, which will ultimately lift economic growth.

Inflation remains benign

Inflation outcomes have surprised on the downside for most of 2019 and the outlook remains benign, said Mhlanga. “The SARB has cut rates by 25 basis points to 6.25% to boost consumer demand; however, the impact of this rate cut on economic growth is negligible.”

Alexander Forbes said that there is still room for more cuts but the risk of credit rating downgrade from Moody’s keeps the SARB cautious.

“The credit rating downgrade is largely priced in by financial markets such that the impact on asset prices will likely be limited.  However, the macroeconomic adjustment, following the downgrade to sub-investment, is usually painful and lasts for a very long time depending on the speed and extent of policy response,” said Mhlanga.

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