New leadership and ensuing policy announcements have boosted local and foreign investor confidence in South Africa – but structural challenges remain.
This is according to S&P Global Ratings which has raised its GDP growth forecast for South Africa to 2% for 2018, from 1% previously. It also revised its forecast for 2019 up to 2.1%, from 1.7% before.
This is partly due to strengthening domestic and foreign investor sentiment following a change in the country’s leadership and ensuing policy announcements, it said in a statement on Tuesday.
It highlighted that an ongoing global upturn is also boosting demand for both commodities and manufactured goods, while improved investor sentiment has translated into a stronger rand, lower inflation, and lower bond yields, compared with previous expectations.
A more favorable inflation outlook has also given the central bank room to ease monetary policy, it said.
South Africa’s Monetary Policy Committee (MPC) will meet on Wednesday (March 28), and with the strong rand and inflation under control, a possible rate cut is on the cards.
“A revival in confidence and lower funding costs should support business investment, while a boost to real income from lower inflation bodes well for household spending.
“This should more than offset any drag on growth from the announced fiscal tightening,” said S&P senior economist Tatiana Lysenko.
“Our revised growth forecast for 2018 also takes into account recent statistical releases. The economy finished 2017 on a high note, with annualised quarterly growth jumping to 3.1% in the fourth quarter.
“Moreover, historical revisions to national accounts show somewhat more resilience compared with data reported previously.
“Taken together, this implies a stronger carry-over this year and lifts 2018 growth,” she said.
But S&P also questioned how quickly reform efforts will ease structural constraints to economic growth.
Structural challenges relate to labor and product market inefficiencies, including in the large state-owned enterprise (SOE) sector, and poor education outcomes and skills shortages.
GDP growth of just above 2%, or 0.5% in per capita terms, is very low for a country at South Africa’s income levels, and not sufficient to sustainably reduce its very high unemployment levels.
“The government has taken some steps to improve governance of SOEs, which is an important development, but we are yet to see reform progress in other areas.
“A key constraint is the rigid labor market with its inefficient wage-setting mechanisms and high barriers to entry and exit,” said Lysenko.
“Further, the economy remains exposed to tightening liquidity conditions.
“Nevertheless, we no longer see South Africa as among the ‘fragile five’ emerging markets that would be most vulnerable to the normalisation of monetary conditions in advanced economies,” she said.