Nedbank says that South Africa’s move to an adjusted level 4 lockdown will disrupt, but not wholly derail the economic recovery.
In a research note on Thursday (8 July) the bank said that the severity of the third wave is expected to undermine confidence, making both consumers and companies more cautious.
“Value added in most sectors will grow at a slower pace in Q3, while sharp declines are anticipated in those sectors directly affected by the new restrictions.
“Critically, we assume that the third wave starts to recede by the end of July, that cool heads prevail around decisions to tighten lockdown restrictions and that the country gradually returns to level 2 or 1 by the end of September.”
From Q4 onwards, the recovery is likely to resume, the bank said.
We have revised our GDP forecast up to 4.6% for calendar 2021, compared with the 3.9% reflected in May’s edition, mainly to account for the economy’s stronger-than-expected performance in the first half of the year.
“More uncertainty surrounds our GDP forecasts in the quarters ahead, not only because of the unpredictable nature of the pandemic but also due to upcoming revisions to the GDP estimates by Statistics South Africa.
“These were postponed in 2020 but are now scheduled for September. Given the amount of imputation used to produce the GDP numbers in 2020, the revisions could be more substantial than would generally be the case,” it said.
Elevated fiscal risks
The country’s poor fiscal situation continues to pose downside risks to the rand, said Nedbank, and it warned that the latest developments have not been encouraging either.
“Wage talks between the government and civil service unions have deadlocked.
“The latest news is that the government is sticking to a 1.5% once-off salary adjustment but added a monthly cash gratuity between R1,200 and R1,695 depending on the various salary scales. The two parties are miles apart. The unions want a wage increase of at least inflation plus 4%.”
Civil servants need to accept a three-year wage freeze to meet budget deficit and debt targets, translating into an R300 billion saving for the fiscus, Nedbank said.
It added that credit rating agencies are sceptical of the government’s ability to freeze wages after years of above-inflation increases.
“Therefore, the risk of expenditure overruns remains high, which, unless matched or exceeded by increases in tax revenue, could worsen the country’s already poor fiscal metrics.”
Nedbank said that global economic conditions remain supportive of risk-taking, but global monetary conditions are changing.
“Higher inflation across the world and expectations of an earlier normalisation in the US’s ultra-easy monetary policies are likely to weigh on risk sentiment, slowing capital flows to emerging market economies, and placing moderate pressure on emerging market currencies, including the rand.”
Elevated commodity prices and a current account surplus should offer some counterweight to the more adverse global landscape, the banks said.
“Given that our purchasing power parity calculations suggest that the rand is trading around fair value, we expect the rand to depreciate moderately during the remainder of the year.”