Business

South Africa’s ‘growth’ narrative is all wrong: analyst

Staff Writer

 ·8 Mar 2017

The current belief that South Africa’s economy is growing “off the bottom” of 2016’s NeneGate scandal, and giving the South African Reserve Bank room to cut rates is completely wrong, says research analyst at Nomura, Peter Attard Montalto.

In a market note to investors, Attard Montalto said that the latest GDP data released by Stats SA shows that the South African economy lacks momentum to lift it out of stagnation – while a false perception persists that the SARB is looking for any opportunity to cut rates.

South Africa’s latest GDP data showed that the last quarter of 2016 saw growth in the economy decline by 0.3%, making the total GDP growth for the year push to 0.3% – just below estimates of 0.5%.

According to Attard Montalto, mining was particularly weak during the quarter which seemed to sit at odds with the commodity cycle kicked off by the US elections and generally stronger growth momentum.

Retail, utilities and transport stood out for being stronger than the rest of 2016 on quarterly growth terms though was offset by big contractions in manufacturing and mining.

Other factors broadly bumbled along, he said.

“Overall, it’s hard to say there was any particularly strong driver of growth showing
momentum. The economy appears to be sputtering between sectors but no consistent driver,” the analyst said.

Attard Montalto rejected the ‘off the bottom’ narrative (a South African recovery post-NeneGate), saying that, while things have obviously improved after the dismal first quarter of 2016, fundamental problems existed even before the NeneGate scandal – especially in productivity growth and in unemployment.

According to the analyst, GDP per capita is the more important metric “as it highlights the wider implications of the current level of growth in the developmental context of a rising population”.

“Here we see another two years of negative per capita income growth as real growth fails to live up to the level of population growth.

“GDP per member of the labour force paints an even more negative picture given the demographics, and hence why the level of growth outlined here is paralleled, in our view, by steadily rising unemployment.”

Read: These are the richest and poorest countries in the world – including South Africa

Because of the lower GDP base (due to lower growth in 2016), Nomura has adjusted its 2017 GDP growth forecast marginally to 1.1%, keeping the forecast for 2018 at 1.5%.

Don’t expect rate cuts

Attard Montalto also dismissed the market perception that growth data for South Africa was giving the Reserve Bank room to cut rates, calling the talk around it “overplayed”.

This is because there was no surprise in the data, which is in line with SARB forecasts.

“More fundamentally, we think the market view is completely wrong on how the
SARB MPC is operating here.

“There is a strong view in the market that the SARB is opportunistic and will look for any excuse to cut. We think this couldn’t be further from the reality,” Attard Montalto said.

“The question the market cannot answer is what the point in such an opportunistic cut would be? The SARB has said on many occasions it would see low efficacy of a cut, no particular support for growth in any sustainable way (it would not shift the structural constraints on growth). It would fear having to reverse course with such a backdrop this year.”

The analyst said that Nomura is of the view that the SARB is “broadly happy sitting just below a neutral level of rates”, with the hurdle to cuts remaining very high until the end of 2018.

Read: South Africa’s GDP declined by 0.3% in the fourth quarter of 2016