8 reasons why you shouldn’t be too optimistic about SA’s economy in 2017
Analysts at Nomura believes that the market is being far too optimistic about South Africa’s political and economic prospects for 2017.
The financial group argues that the accepted positive spin on the country is off the mark as it is ignoring a number of risk carrying factors.
Some investors hold a bullish view of South Africa’s prospects in 2017, where market conditions align to give the country the edge it needs to accelerate growth and see through any political turbulence.
In a note to investors last week, Nomura however, anticipates a slightly more chaotic journey through the year, with more bad news than good news expected to upset the balance.
“We have been interested by the narratives proposed by segments of the market to justify the rally in ZAR since the start of the year,” the group said.
The core problem, Nomura said, is that South Africa appears to be carrying a ‘zero risk’ premium in the market view, which ignores a number of risk carrying factors.
This includes a ratings downgrade risk; a probable cabinet reshuffle; the ANC’s economic policies; ANC election shocks; as well as various global and emerging market moves which impact the country.
“When we add all this together with the growing investor worries we see eventually hitting home on both the status quo for succession and on policy specifics, we have kept our R15.50 year-end USD/ZAR view.
“A lack of a reshuffle could take ZAR lower first, however – yet the forces and direction of travel in South Africa suggest a need for risk premia to us,” Nomura said.
Here are eight bullish and bearish outlooks for the market in SA:
Rand fair value
| Bull | Bear |
|---|---|
| Economic fair value is around R11.00-R12.00 to the dollar and that’s where it will go. | While the fundamental fair value is indeed R11.50-R12.00, this implies the political risk premium is zero, which is not the case. Emerging market currencies always diverge from fair value and there’s no reason South Africa should gravitate back |
Terms of trade
| Bull | Bear |
|---|---|
| Strong terms of trade and a global commodity cycle will help SA and should mean a stronger ZAR | Terms of trade to a leg up after Trump’s election, but have since plateaued. SA has largely sat out of global commodity cycles and constraints (such as labour issues, political uncertainty and regulatory problems) are worse now than previous cycles. |
Current account
| Bull | Bear |
|---|---|
| There has been meaningful consolidation in the current account which means ZAR should be stronger. | Trade balance has moved from deficit to balance – but not to surplus like many crisis countries. Income balance is still the key driver, cannot be ignored, and is not going to shift. Marginal widening of the trade deficit this year will keep the current account deficit over 4%GDP. |
CPI
| Bull | Bear |
|---|---|
| CPI will fall sharply to below 5% on food prices and a strong ZAR. | There is too much concentration on raw and PPI food prices. There has never been significant food price deflation in South Africa before as negative food price shocks are taken into margins by retailers. The drought has a long tail. CPI likely only basing around 5.5% in Q3. |
SARB
| Bull | Bear |
|---|---|
| The South African Reserve Bank can cut rates, given strong ZAR and CPI coming lower. | The SARB is not concerned with short run inflation falling and are targeting long end inflation in their forecast which currently sits around 5.6%. The SARB still retains a ‘fear cycle’ view of the currency, inflation and rates which means the bar to cuts is very high. |
Economic growth
| Bull | Bear |
|---|---|
| SA is ‘off the bottom’ of the NeneGate scandal in 2016, and 2017 looks more positive. | In year-on-year terms, SA is ‘off the bottom’, and 2017 growth will be higher than 2016 – but this misses the point that per capita growth (a more important metric) will be negative until 2019. There are no meaningful drivers of growth, while consumers are looking weaker. |
Politics
| Bull | Bear |
|---|---|
| President Jacob Zuma is weak and deputy president Cyril Ramaphosa will win in the ANC’s December elective conference – and the ANC could be below 50% of the national vote in the 2019 election. | Zuma is weaker than pre-NeneGate, but the November NEC showed that he is still in a position of strength. Ramaphosa’s chances in December are overestimated, and chances are higher for a Nkosazana Dlamini-Zuma win. The ANC will likely win more than 50% of the vote in 2019 (52%), with other parties already capped on the upside. Political status quo most likely. |
External factors
| Bull | Bear |
|---|---|
| US Fed tightening will have limited impact on South Africa with high yields and a steep curve. | Emerging markets as an asset class will be supported by delayed fiscal activity in the US, but SA still remains at risk due to political and ratings risks. Markets will wake up to see Emerging markets have rallied too much in recent months. |
Read: The real state of South Africa’s economy – and why a tax revolt is coming
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