Storm clouds gather for South Africa as V-day approaches

 ·9 Apr 2024

Economists at Momentum Investments say that warning signals for South Africa’s economy continue to get flagged as the country heads towards voting day on 29 May 2024.

While the global narrative for economic growth has steered shifted from talk of a so-called “hard landing” to a “soft landing” to “no landing”, recession indicators are still being flagged, the group said.

This includes inverted yield curves, disrupted trade flows, supply chain shortages, increased uncertainty and higher risk premia from geopolitical tensions.

There is also a high degree of political uncertainty, which the group warned could lead to higher inflation, lower growth and significant welfare losses.

“As such, a more explicit link between economic policies and foreign or national security policies are likely to form going forward,” they said.

Given this, as well as data coming in from central banks, markets have significantly pulled back on the number of expected interest rate cuts for 2024, Momentum said – something South Africa has also not escaped.

Also looking locally, political tensions and other global economic impacts are also likely to be felt back home, with South Africa also nearing its own general elections in May.

Political uncertainty has been flagged as the top-rated constraint facing new investment by businesses in South Africa. This comes against a backdrop of the potential for a multi-party government to take over for the first time in South Africa’s democratic history.

Polling shows that the African National Congress (ANC) is likely to fall below 50% of the overall vote since coming into power in 1994.

While more rural provinces are expected to remain squarely in the hands of the ANC, economic hubs like Gauteng and KwaZulu Natal are likely to be hotly contested, which could have implications for the country’s economy.

“Polls for the 29 May 2024 general elections currently flag significant risk for the incumbent ruling party. While progress towards democratic pluralism is a step towards a more diverse political landscape, coalitions have not had a stellar record at a local level in South Africa,” Momentum said.

The economists noted that many of the newer parties contesting the elections are headed by former “political influencers” who have the potential to pull voters away from more established parties and capture some of their “disillusioned voter base”.

However, the economists reiterated that coalitions in South Africa have a poor record, with major metros being governed by ineffective partnerships. On a national level, this poses significant risks, especially when dealing with South Africa’s many crises.

On top of political risks impacting growth, Momentum also flagged upside risks to inflation – including a weaker exchange rate, administered prices and the aforementioned geopolitical tensions driving global prices higher.

The country will also have to deal with ongoing power and logistical woes, weaker global commodity prices and a restrictive South African Reserve Bank, even when it eventually enters a cutting cycle.

“Although the SARB is likely to pivot course this year and lower interest rates, monetary policy should remain restrictive in inflation-adjusted terms in the coming months in view of upside price pressures,” Momentum said.

“The SARB is likely to take note of the inflationary effects of fiscal stimulus which restrict the bank from lowering rates by too much too soon.”

Echoing other analyses, Momentum said that rate cuts should come in the second half of the year, forecasting 50 basis points worth of easing by the close of 2024.

Read: Mood shifts for interest rates in South Africa

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