The unevenness of vaccine rollouts across the world provides fertile grounds for new Covid variants to cause sporadic disruptions in the global economy, impacting negatively on economic growth and financial market risk sentiment in the year ahead, say economists at financial services firm Momentum Investments.
However, the negative growth impact of each new Covid mutation wave is likely to become less severe going forward, unless vaccines become less effective against new virus variants or new mutations more fatal, leading to renewed spikes in hospitalisation and mortality rates.
Momentum Investments said that against a backdrop of milder global growth, shaped by less accommodative fiscal and monetary policy, demand for South Africa’s exports is likely to soften.
Moreover, even as a faster-than-anticipated rebound in wages spurred household spending in 2020, the dark cloud of lingering unemployment will take the shine off consumption spending in 2021,” said Sanisha Packirisamy, an economist at Momentum Investments.
She said that tepid credit growth and further interest rate increases suggest that credit-driven purchases are unlikely to be a major contributor to household spending in 2022.
While restrictions on economic activity went from affecting 45% of the economy to under 3% of the economy, as the Covid-19 pandemic evolved from the first wave (March to October 2020) to the second (November 2020 to January 2021) in SA, moving from the second to the third wave did not have as large a positive effect on growth.
“Similarly, moving towards a lower level of restrictions during 2022 will likely have a smaller positive effect on growth outcomes. As such, we see growth slowing from an estimated 4.9% in 2021 to 2% in 2022 and 1.8% in 2023.”
SA’s fixed investment ratio has trended lower
Trend growth remains capped by weak fixed investment trends, Packirisamy said.
Growth data from the second quarter of 2021 showed that the construction sector was still 21% below pre-pandemic levels, with the next worst-performing sector (transport, storage and communication) only 9% weaker (see chart 6). SA’s fixed investment to gross domestic product (GDP) ratio slipped to 13.1% by the middle of 2021, from 19% at the end of 2013.
Momentum Investments said that the raised cap for electricity self-generation should unleash additional projects in the mining and minerals sector, in particular.
Moreover, new project announcements in relation to Bid Window 5 of the renewable energy independent power producer programme and secured concessional climate financing have been positive announcements in the energy space.
Meanwhile, the prospect of private sector participation, to scale up capacity at the ports and reduce logistic costs, is likely to increase efficiencies and competitiveness in the logistics sector.
A more fragmented political landscape presents challenges to fast-tracking key structural reforms to resolve low trend growth in South Africa, warned Packirisamy.
Momentum Investmentsnoted that a staggering 14.2 million registered voters did not turn up on the day to cast their ballot at the beginning of November, with voter turnout rates dropping as low as 33% in some townships on rising frustration over inadequate service delivery.
“Some political commentators have warned that the results of the vote may tempt the introduction of more populist policies as the ruling party attempts to win back defected voters,” said Packirisamy.
“If the focus has indeed shifted from more localised issues, such as service delivery, to concerns over national policy, this would pose a further threat to government’s fiscal consolidation and debt stabilisation goals.”
Debt, debt, debt
Restraining expenditures, defunct municipalities and increased allocations to financially- and operationally-ill state-owned enterprises (SoEs) remain key risks to the country’s fiscal consolidation path, said Momentum Investments.
Though finance minister Enoch Godongwana’s maiden budget broadly appeased financial markets – mostly thanks to an outsized revenue outcome following a commodity price boon, an upward revision to nominal GDP through a reweighting exercise and deferred decisions on expenditure items – the size of South Africa’s (gross) debt burden is still large at R3.9 trillion.
“Risks to restraining expenditures, defunct municipalities and increased allocations to financially and operationally ill state-owned enterprises, in addition, remain high in our view. The two largest risks to the short- to medium-term expenditure profile arise from the civil servant wage bill and the undeniable need to address high levels of poverty in South Africa,” Packirisamy said.
Interest rates, the rand and food prices
Momentum Investments said that while the South African Reserve Bank’s (SARB) quarterly project model (QPM) calculates a steep interest rate hiking cycle, resulting in interest rates of 5.75% by the end of 2023 and 6.75% by the end of 2024, it believes that well-behaved inflation, anchored inflation expectations and a pedestrian growth outlook advocates a more moderate interest rate hiking cycle.
“We expect the SARB to hike interest rates thrice (by an accumulative 75 basis points) in 2022 and a further three times (total of 75 basis points) in 2023. Hailing from a global and local backdrop of ultra-accommodative monetary policy, we do not see the neutral interest rate recovering as far as to 2.4% in the medium term as indicated by the QPM and, instead, see this rate closer 1% by the end of 2023,” said Packirisamy.
The financial services firm said that the surge in global food prices is less likely to translate into soaring local food prices, subsequent to the drop in correlation in South Africa’s food prices relative to global food prices. This, it said, is particularly good news for lower-income earners, who spend a significant portion of their income on food expenses.
Momentum Investments warned that elevated energy costs pose a risk to transport inflation, and indirectly to food inflation, in the near term, but warmer weather expected in the Northern Hemisphere, by the second quarter of 2022, should lower oil demand and allow recovery in supply, driving oil prices lower.
Petrol inflation accounts for 4.6% of the consumer basket, but the broader transport category – which includes vehicle purchases – accounts for an average of 13.9% for the top three highest income-earning deciles. “We expect headline inflation to average 4.5% in 2021, 4.6% in 2022 and 4.3% in 2023,” said Packirisamy.
Momentum Investments said that while negative sentiment driven by the unknowns of the new viral strain could cause further temporary weakness in the rand, it expects the local unit to recover from current levels (R16.07 at the time of writing) but warns that the rollover in the country’s exported commodity prices will unwind recent gains in South Africa’s terms of trade and as such will cap the extent of the rand recovery from these levels.
“Further out, we see a weakening bias embedded in the currency on elevated fiscal risks in the medium term and concerns around trend growth,” said Packirisamy.