Research and market analysis firm Nomura is predicting a relatively quiet first half of the year for South Africa, but expects things to shake up in the second half of the year as the ANC’s elective conference comes into view.
The analysts expect ‘political war’ in December, where a number of shocks can occur, but a number of events still need to take place before then, including the party’s policy conference and consultative conference, and the state of the nation address in November – all while the threat of a cabinet reshuffle hangs in the background.
“All this should keep growth weak, albeit slightly stronger than in 2016,” the group said.
“We see this having little impact on the SARB, unless the currency weakens, though downgrade risk will be an important secondary narrative. South African asset prices should perform ‘ok’, but mainly because there are more negative peers to compare to – Turkey especially.”
There won’t be any interest rate cuts as long as the far end of inflation forecasts remain above 5.0%. The risk of rate hikes rides on any sharp weakness in the rand and deterioration in expectations and wages.
“We think the SARB still views policy rates as accommodative (just), but will only hike rates further if the currency weakens markedly. If not, rates should remain unchanged with no cuts on the forecast horizon as long as inflation is not fully anchored below 5.0% at the long end of the forecast.”
There will be a slow recovery, showing low potential. Private sector investment will be key to any growth this year, but the same old risks remain. The predicted GDP growth for 2017 is forecast at 1.0%.
“We expect a slow fading of the political shocks supressing growth and private sector investment, allowing growth to jump from 0.5% in 2016 to 1.0% in 2017, but this is still negative per capita income growth and the risks are again to the downside on potential political flare-ups.”
There will be a dip in inflation in the first half of the year following effects from the food base, but it is expected to rebound with headline and core inflation remaining near the top end of the 6% targets.
“We expect the SARB to be on hold through 2017 and 2018, though the risks are for a hike if expectations and long-run inflation move higher which could happen on a sharper weakening in the currency.”
The country’s fiscal status will be “okay” in the short run, but medium run risks are mounting and the country’s debt levels are grinding wider, Nomura said.
“The National Treasury remains hopeful that a recovery in per capita income growth will aid fiscal sustainability, but we do not see this and so we expect fiscal consolidation and debt stabilisation to stall.”
The country’s current account will slowly widen back.
“Real net trade should be a contributor thanks to strong exports, but offset by further destocking. Downside risks come from possible Trump protectionism. Put simply, it is hard to see any sources of stronger growth.
There is potential for growth-boosting reforms to be introduced in 2017 but thanks to the political climate, the chances of this happening are very slim, Nomura said.
“The ANC will likely be internally focused on the five-yearly elective conference in December…Zuma is weakened but not weak – he has scope for a reshuffle early in the New Year – though, constrained by his own side, is unlikely to be able to remove the Finance Minister. Overall politics are likely to be a distraction from policy.”
Despite avoiding a cut to junk status in 2016, the risk is still very much alive in 2017, with a mid- and end-year chance to be cut due to slower growth.
However, should finance minister Pravin Gordhan be booted from his position, chances are extremely high that would lead to an instant cut to junk, Nomura warned.
“A 2016 rating reprieve shows agencies unable to decide the direction of growth and reforms and so allowing the benefit of the doubt. This should eventually run out – possibly in 2017 – and result in downgrades.”