Wednesday 14, March 2018 by Jessica Combes

South Africa on the precipice


South Africa is in need of reform to put its economy on the right track. 

We turn to South Africa for our Country Focus this month. This comes as a perhaps timely update following the resignation of Jacob Zuma and the swearing in of Deputy President Cyril Ramaphosa as President.

Zuma’s reign as leader of South Africa has been marred by corruption scandals and a flagging economy, with the country’s downgrade to junk status late last year by ratings agencies still fresh. The resignation itself was covered in more detail in our News Analysis section on page 6 this month, here we will focus more on the economic situation that South Africa finds itself in, and what the country’s new leadership will need to do to secure long-term economic prosperity.

Economic growth stagnated in 2017, with IMF (International Monetary Fund) estimates placing overall GDP growth at 0.7 per cent. Early estimates suggested that growth in 2018 would not improve significantly. “IMF staff anticipates that the subdued economic growth of 0.7 percent, projected by the authorities for 2017, is not likely to improve much in 2018,” said Ana Lucía Coronel, the leader of an IMF mission in late 2017. “Growth would recover only gradually in the medium term, unless the pace of implementation of structural reforms accelerates quickly enough to prompt a clear recovery in business and consumer confidence.”

However, more recent analysis throughout early 2018 suggests an improvement in GDP growth figures. The victory of Cyril Ramaphosa as party president in the ANC National Congress in December 2017 caused a revision of figures upwards, with the South African Reserve Bank (SARB) forecasting the economy growing 1.4 per cent in 2018 (up from 1.2 per cent). It is important to note the overall encouraging financial market reaction to Ramaphosa taking the reigns as the interim President of South Africa, and likely favourite for in the 2019 general election.

“The market reaction to Zuma stepping down from position as President of South Africa has been a positive one. There have been months of ongoing speculation over his future, and confirmation of Jacob Zuma resigning has basically provided a climax to persistent political uncertainty,” said Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM. “The rand has strengthened to its highest level since March 2015, with the currency having strengthened by nearly 2.4 per cent against the dollar this week [12-16 February]. The currency has also strengthened against all of the G10 currencies, suggesting that the confirmation of Zuma vacating his position has benefited investor sentiment,” Ahmad added.

Businesss woes
The Standard Bank Purchasing Mangers’ Index (PMI) registered at 49.0 in January this year, a small gain from 48.4 at the end of 2017. The indicator uses the 50-point threshold to indicate business expansion from contraction. The overall figure is derived from new orders, output, employment, suppliers’ delivery times and stocks of purchases. January’s figure of 49.0 makes the sixth successive month that headline PMI has been recorded below the 50-point mark.

This suggests a continued deterioration in business conditions in South Africa, with business activity contracting in the wake of decreased client demand and firms struggling to win new business. The exception to this overall negative trend were reported employment figures, rising for the first time in three months. Commenting on January’s survey findings, Thanda Sithole, Economist at Standard Bank, said, “The private sector PMI for January 2018 indicated that domestic business conditions continued to deteriorate albeit at a slower rate posting a reading of 49.0 from 48.4 in December.

This is still lower than both the 51.3 posted in January 2017 (which was a fall from an expansionary territory whereas the latest print is an uptick from a contractionary territory) and the 49.8 average for 2017. “In our view, the uptick in the private sector PMI toward the 50-point mark is in itself a positive signal and we expect continued uptick over the coming months premised on improved economic optimism following the improving domestic political backdrop and some government intervention to restoring good governance in State Owned Entities (SOEs). This combined with pent-up demand should underpin a reasonable economic recovery, although the upside is constrained by structural impediments.”

Inflation moderates
Inflation decreased to 4.6 per cent in November, within the Central Bank’s target range of between three and six per cent, from 4.8 per cent in October. Annual average inflation also decreased slightly to 5.4 per cent in November, from 5.6 per cent in October.

Since April 2017 inflation has stayed within the Central Bank’s target range. For 2018 the Central Bank forecasts inflation at 4.9 per cent and 5.4 per cent in 2019. FocusEconomics’ panellists in its Consensus Forecast expect inflation to average five per cent in 2018, and 5.2 per cent in 2019.

Reforms necessary
Despite the removal of Jacob Zuma as the President of South Africa, the legacy left behind is one of corruption and state capture. The incoming administration will need to work hard on fixing these issues. Ramaphosa has already pledged to address South Africa’s endemic corruption problem and promote a more business-friendly environment. Doubts remain as to how effective these economic policies may be, however.

“The new leadership could bring confidence and faster implementation of key reforms already undertaken. However, Mr. Ramaphosa and his administration will require time to design and implement measures to improve economic growth and stabilise public finances, given the structural and institutional challenges that South Africa faces,” said Standard & Poor’s following the resignation of Zuma and formal swearing in of Ramaphosa as president. “Economic growth remains low, impeding the path to fiscal consolidation. We think the government will attempt to introduce offsetting measures in an effort to improve budgetary outcomes, but these may not be sufficient to stabilize public finances in the near term. We have determined, based solely on the developments described herein, that no rating actions are currently warranted,” the agency continued.

Moody’s made similar statements with Zuzana Brixiova, Vice President, commenting, “Moody’s is closely monitoring developments in South Africa and is focused on the policy implications of ongoing changes in leadership. The key point from a credit perspective will be the new leadership’s response to the country’s economic and fiscal challenges and progress in implementing reforms addressing them.”

Christine Lagarde, Managing Director of the IMF met with Ramaphosa in late January, prior to the Zuma resignation, and said that, “We concurred that long-standing structural challenges continue to weigh on growth in South Africa. We consequently agreed that bold and timely reforms are needed to create an environment conducive to job creation and less inequality. “Recent initiatives to improve governance and strengthen public institutions are steps in the right direction. These efforts need to be sustained and be complemented both by fiscal policies that stabilize debt at manageable and sustainable levels, and by the reestablishment of business confidence to make the economy more productive and competitive.”


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