While South Africa’s economy is expected to grow marginally over the next several years, to strengthen in the longer term it will need to improve in several key areas including education and energy costs, says Sanisha Packirisamy, an economist at Momentum Investments.
The local economy missed out on a generous growth opportunity during the last decade, in which the world was awash with cheap capital, the financial services firm said.
South Africa’s growth diverged more markedly from the rest of the world after reaching a peak in its terms-of-trade in 2011. Since then, growth in the country’s GDP under performed the globe by an average 1.8%, and emerging markets by 3.2%, per year.
Despite its terms-of-trade recovering from a bottom reached in 2014 to levels higher than the 2011 peak in the final quarter of 2017, weak consumer demand, disappointing private sector fixed investment, a prolonged drought and heightened political uncertainty continued to weigh on growth activity.
Momentum noted that political fortunes, however, shifted favourably at the December 2017 African National Congress (ANC) National Elective Conference. The election of a new and well-received leadership caused a positive knee-jerk response in investor, business and consumer sentiment, but confidence levels have since re-adjusted to less euphoric levels.
“Since succeeding Jacob Zuma, as president in February 2018, Cyril Ramaphosa has increased efforts to convince investors of his unwavering commitment to reverse poor growth outcomes, reduce political uncertainty and address rampant corruption and state capture in the ANC and the state,” said Packirisamy.
In an effort to strengthen the cohesion of the ruling party and bring about organisational renewal, the ANC made 11 changes in the formation of the new national working committee (the party’s highest decision-making body) at the start of the year.
With a majority of members of the National Worker Committe backing Ramaphosa, this could help alleviate potential stalemates in the wider National Executive Committee, which is more evenly balanced in terms of Ramaphosa and Zuma supporters.
In his first 100 days in the presidency, Ramaphosa also appointed a strong, independent economic adviser and announced two summits, on jobs and investment, to buffer investor confidence in his ability to turn around a moribund economy.
Encouraging changes in the finance, public enterprises, mineral resources and energy portfolios in a wide-sweeping cabinet reshuffle, calling for an inquiry into state capture projects (including the suspension of the SA Revenue Services commissioner and the removal of the head of the SA Police Service Crime Intelligence unit), a re-institution of charges of corruption against the former president and a broad governance clean up at board and senior management level of the country’s key SoEs are further evidence of a new trajectory in SA.
Ramaphosa’s Herculean task to address SA’s deep inequities has the potential to be achieved through his 10-point growth plan, namely:
- Focusing on creating jobs;
- Lifting growth through increasing investment;
- Accelerating transfer of ownership and control over the economy to black citizens;
- Widening economic participation;
- Ensuring economic sovereignty through avoiding an unsustainable debt trap;
- Improving access to quality education;
- Expanding manufacturing capacity;
- Boosting spend on critical infrastructure;
- Restoring SoEs as drivers of growth and social developmentt;
- Confronting corruption.
“But the land reform and policy restitution discourse underway and a delay in the finalisation and implementation of the new mining charter are hindering the president’s attempts to uphold positive sentiment,” said Packirisamy.
A more stable political environment, domestically, could regrettably be overshadowed by bigger factors trending in the global economy, the economist said.
The world is fast approaching the point at which net global liquidity additions will be turning negative. Emerging markets, she said, will soon be forced to adjust to a withdrawal of liquidity and increasing global interest rates.
“Alongside tighter financial conditions, the effect of the fourth industrial revolution on lower-skilled workers, a surge in popularism and growing anti-globalisation sentiment could limit the risk appetite global investors have for EMs and for a continuation in the carry trade – borrowing at lower rates in DMs and investing in EM currencies with a higher interest rate.”
The Macro Research Desk at Momentum noted that South Africa’s economy is expected to expand by 1.7% in 2018 and 2.1% in 2019 against a positively changed political environment supporting increased business and consumer confidence, but for growth to strengthen in the longer term, the OECD advises the country to improve on the following:
- Education access and quality;
- Reduce energy costs;
- Develop transport infrastructure;
- Deepen region integration;
- Enforce sanctions for breaches of the Public Financial Management Act;
- Reduce regulatory red tape;
- Develop apprenticeship and internship programmes to increase youth employment.
A higher medium-term growth trajectory, tax reforms and expenditure cuts have created space for more investment in higher education, while still allowing for fiscal consolidation in the medium term, Momentum said.
Although still higher than the average BB-median-rated country, the country’s debt levels are expected to stabilise against GDP in the medium term, it said.
“The three major credit rating agencies have acknowledged the country’s fiscal efforts, but warn a fiscal deterioration, a migration of SoE debt to government’s balance sheet or populist political posturing could trigger negative ratings action,” said Packirisamy.
The country’s inflation is expected to climb from its April 2018 low, but is still seen to remain within the target band in the medium term, the economist said. With rand and oil prices posing significant upside threats and inflation expectations still a way from the midpoint of the target band, the next move in interest rates is likely higher.