South Africa’s economy will likely face a rocky 2020 as ANC infighting and problems at the country’s state-owned enterprises dominate discussions, says chief economist at the Efficient Group Dawie Roodt.
While there is a silver lining in the continued independence of the South African Reserve Bank and the possibility of a stronger rand, Roodt said that the country will also have to deal with a number of major hurdles including Eskom and a likely increase in taxes.
Below he outlined his expectations for 2020.
The Reserve Bank and inflation
Roodt said that South Africans owe Lesetja Kganyago, governor of the South Africa Reserve Bank (SARB), a huge debt of gratitude for his continued defence of the central bank’s independence.
“Additionally, the lower inflation rate at the end of 2019 proves that he was also successful in his primary objective of protecting the value of the currency,” he said.
“But even more importantly, future inflation expectations are also slowly ‘drifting’ lower which shows that the SARB succeeded in its endeavour to ‘manage’ inflation expectations lower.
“Although the official inflation target of the SARB remains between 3% and 6%, they recently announced that 4.5% is their preferred target. Markets didn’t really believe this but at the end of last year inflation reached its lowest levels in many years. It’s even possible that the inflation rate can fall to below 3%.”
Roodt said that the South African financial markets are also particularly attractive in terms of valuations.
“Even if we are downgraded, something I’m strongly suspecting, the rand and our financial assets may just perform well in 2020. This is good news because the SARB then has room to cut interest rates,” he said.
Mismanagement to hit growth
The mismanagement of Eskom, and the subsequent limited supply of electricity, means that the rate at which the South African economy can grow is severely constrained, said Roodt.
“I expect an economic growth ceiling of approximately 1% which means that growth could be lower but unlikely to exceed 1%.”
“The state’s debt is at a record high and rising fast, while our beloved Eskom alone owes more than R500 billion. The rest of the SOEs are also mostly mismanaged while the finances of the local authorities are at a similar state of collapse.
“I think we can safely say that the ‘state’ is in the process of collapsing.”
To stabilise the state’s finances, Roodt believes that only two options are available:
- Limit state spending (expenses) dramatically;
- Increase the state’s revenue (more taxes).
“The downside: any of these two options will reduce the stimulatory effect of the fiscus and hence will further stunt economic growth in the short term,” Roodt said.
“I have no doubt that several taxes will be increased. My only uncertainty is whether VAT will also be increased and by how much personal income tax will be increased.
“A VAT increase, which is the least damaging option, is politically almost impossible, while higher personal income tax will be much easier to implement.”
Mboweni the best man for the job
Roodt said that Tito Mboweni is the best man for the finance portfolio, but is likely to face enormous odds in 2020.
“The ANC’s raison d’être is to seize the state in order to feed and maintain its own massive patronage. Without consistent high state spending, the ANC simply loses its reason for existence.
“So, it’s unlikely that a significant reduction in state spending will be possible at all. I’m also not holding my breath that Mboweni will last that long as the minister of finance.”
‘Other stupidities’ could push a downgrade
“Then there is also the very likely possibility of other stupidities,” said Roodt.
“Further steps are likely to be implemented to follow through on the planned National Health Insurance – which is in anyway doomed to failure – prescribed assets may come a step closer and an increase in forex controls is also possible.
“And this just further entices the downgrading-sword hanging over us. Not that a downgrade should make much of a difference, I believe that much of the bad news has already been priced into the markets.”