Two major red flags in a week of good news
South Africa had a great week on the economic front last week, with Stats SA reporting a significant drop in inflation, the Reserve Bank holding on interest rates and the rand ending stronger against the dollar.
However, economists at the Bureau for Economic Research have raised red flags around two key industries in South Africa’s economy: mining and agriculture.
In the group’s latest weekly review, the economists flagged data from the mining sector published last week amid all the good news – specifically profit warnings from some of the country’s biggest mining operations.
“A major local fiscal risk that we have cautioned about is materialising,” the BER said.
“This concerns weaker mining sector profits amid slumping SA export commodity prices and poor logistics infrastructure in South Africa.”
Anglo American Platinum (Amplats) and Kumba Iron Ore cautioned last week that profits in
the six months to end June 2023 could decline by 75% and 22%, respectively.
“Surging mining profits were the mainstay of a corporate income tax bonanza in 2021 and to a lesser degree also in 2022,” the BER said.
“The abrupt change in fortunes places major downside risk on corporate, and overall, tax revenue in the current (2023/24) fiscal year. This is an important reason why, for some time, we have cautioned that Treasury was set to vastly undershoot its February 2023 main budget deficit expectation (3.9% of GDP) for 2023/24.”
The BER noted that, compounding the negative impact on the economy, mining companies have flagged logistics issues which have had a harsh impact on export targets.
“This again highlights that, along with the energy crisis, the railway and port woes are increasingly a drag on South Africa’s GDP growth,” the BER said.
The economists also raised red flags over another development that could hit South Africa further down the line.
The non-renewal of the Black Sea grain deal that enabled shipments from Ukraine despite the ongoing war with Russia pushed global grain prices higher over the week.
“If sustained, this will also impact local grain costs,” it said.
The grain deal, a ban on the export of certain types of rice from India, and likely drier conditions in the grain-producing parts of South Africa in the upcoming summer months due to an expected El Niño weather system, all present “clear upside risks to a relatively favourable outlook for SA food prices“, the BER said.
Good news
Despite the worries over mining, the general outcome of last week’s slew of economic data and activity was positive for South Africa and offered some respite in what has been an incredibly trying 2023 so far.
Even on the GDP front, the South African Reserve Bank’s projections have picked up slightly, with the central bank anticipating 0.4% growth for the year, edging the country further away from recession.
While risks remain, the BER said that this view aligns with its own modelling, with an anticipated 0.4% growth print also expected for the second quarter of the year.
Inflation is also heading in the right direction.
According to Stats SA, the headline consumer inflation rate slowed to 5.4% y-o-y in June from 6.3% y-o-y in May – somewhat lower than the market consensus.
This gave the SARB’s Monetary Policy Committee (MPC) room to hold on interest rates – counter to many expectations.
“The decision was a close call, with three members voting for no change while two opted for a 25bps increase,” the BER noted.
“This marked a notable shift from the previous unanimous 50bps rate hike and a string of rate increases totalling 475bps since November 2021.”
The economists said the change in voting behaviour is particularly noteworthy because, on balance, the MPC remained wary of upside inflation risks, including drier weather adversely impacting local food prices, load-shedding-related costs, and higher-than-expected wage increases.
However, despite the risks, the SARB’s outlook suggests that inflation is on a downward path towards 4.5%
The central bank did warn, however, that the interest rate hike cycle isn’t over – it’s just paused – and that future hikes could come if inflation does not move in the right direction.
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