While greater political stability has been observed lately in South Africa under the leadership of Cyril Ramaphosa, constrained growth remains a function of a slow reform agenda, says Momentum Investments research.
Economists within the research team have forecast GDP growth of 1.5% for 2019, up from 0.7% in 2018, and a recessionary environment. Inflation is forecast at 5.2%, from 4.6% in 2018.
Consumers appear to have passed the peak point of vulnerability, while corporates are still facing a tough environment, said Herman van Papendorp, head of Momentum Investments research.
“Some fiscal slippage is anticipated in the medium term, with the potential need for additional guarantees to fund ailing state-owned enterprises posing a risk to an otherwise stable sovereign rating projection. Inflation is expected to rise, but remains within target, allowing for a shallow interest rate hiking cycle.”
For South Africa, private fixed investment has fallen as a share of gross domestic product (GDP), while spend by government, as a relative share, has remained broadly stable since the global financial crisis.
“However, with sovereign ratings pressure arising from government’s expansionary stance, room for fixed investment spend by government to grow significantly remains limited,” the research head said.
A recovery in capacity utilisation points to the need for additional fixed investment, but constraints to investment, such as political instability and skilled labour shortages, remain high and are having a negative effect on investment intentions and, thus, actual investment growth, Momentum Investments said.
“Actual fixed investment growth remains tepid, but expectations look more upbeat,” it said.
On GDP growth, ratings firm S&P Global expects GDP growth to average 1.8% in 2019, which is a fraction higher than the 2018 Medium Term Budget Policy Statement forecast of 1.7% in 2019 and 2.1% in 2020.
Goldman Sachs meanwhile, expects the local economy to grow almost 3% in 2019, helped by Ramaphosa’s reforms and strong global growth, the bank’s sub-Saharan Africa head told Reuters last month.
On South Africa’s currency, the rand was the fifth worst performing currency against the dollar in 2018 – 13.8% weaker. The rand depreciated by 9.7% against the euro, and 8.6% against the pound, Momentum noted.
However, the local unit has gotten off to a strong start in 2019, thanks in main to a softer dollar and optimism around Ramaphosa’s reforms.
According to Sable International, the rand is up 2.89% against the dollar, dipping below R14.00 in trade on Monday, warning, however, that its appreciation is likely exaggerated due to a lack of liquidity in the market as well as some key international events, which are putting extra strain on the markets.
These events include:
- The US government shutdown – going into its third week;
- China’s strict monetary policies – to prevent a debt crunch in the coming months;
- The trade negotiations between the US and China – this mid-level trade talk will be the first face-to-face interaction between the two superpowers since the 90-day truce.
Andre Botha, senior currency dealer at TreasuryONE said: “The rand consolidated its break below the R14.00 level yesterday, as the market still had some momentum left after the dovish comments by Fed Cahir Powell on Friday. We have seen the US dollar slipped against all major currencies and looked like breaking above the 1.1500 level against the Euro.
“There is also a sense of optimism in the air regarding the US-China trade talks as the equity markets in the US and Asia traded in the green yesterday.”
Botha said that the rand appeared to be running out of steam, meaning it could be somewhat range-bound. “Further momentum could be had tomorrow after the release of the US Fed minutes should the extent of the Fed dovishness be larger than expected,” he said.
“Looking at the coming week, the rand can expect to carry on its positive trend despite the challenges faced by the USD. Technical indications do point to a possible weaker trend by the end of the week,” said Sable.
“The main release this week for the Rand is the Absa manufacturing PMI for December. If the PMI continues to register a sub-50 reading, the rand may suffer as a consequence. South Africa experienced a brief recession in 2018 and a continued decline in manufacturing activity could raise fears of another one in 2019.”
The rand traded at the following levels against the major currencies on Tuesday:
- Dollar/Rand: R14.02 (0.98%)
- Pound/Rand: R17.88 (0.76%)
- Euro/Rand: R16.04 (0.72%)