2018

Post-Brexit Europe and UK offer upside trade opportunities for SA. Diplomats and ratings agencies across the spectrum express concerns over SA policy trajectory, stalled reform. Watch SA appetite for Sino-centric alternative. SA is very vulnerable to rating downgrades in 2019. CEO confidence has fallen steeply through the year. It may bounce post the 2019 polls, but will then dip again if hard reforms do not materialise. Mr Ramaphosa is safe in the ANC for now, but expect determined challenges to his authority post the 2019 polls – undermining any reformist efforts. Minimum wage policy demonstrates the detachment of the Presidency from on-the-ground economic reality.

The mining charter remains hostile to long-term fixed investment in greenfield projects. Policy makers remain invested in the draconian enforcement of racial edicts. Growth rates should come in at around 0.5% for the year in line with electricity consumption data. Forecasts of near 2% for 2019 overstate the reformist inclinations of the government.  Watch the net outflow from bonds and equities in line with weak CEO and other confidence indicators. The deficit and debt level will remain under pressure. Disposable income is essentially stagnant. Tax receipts should disappoint as growth undershoots and there is little revenue-raising room. Interest rates must continue to rise in conjunction with global rates, putting pressure on household spending.

Overall, the US and China are set to deepen their trade war— a resolution in the short term remains unlikely. South Africa looks set to bolster ties with China and, in turn, the Chinese are likely to develop significant leverage over South African domestic policy.

On South Africa’s political landscape, President Cyril Ramaphosa is seen as weak and unable to contain populism. Inside the ANC a serious lobby is being built to challenge Ramaphosa who has been significantly weakened by the recession.

In the policy landscape, the Competition Amendment Bill passed by the Cabinet gives government much subjective discretion in what may be seen as anti-competitive behaviour, opening the door to corruption and uncertainty. The EFF will continue to raise nationalisation of the Reserve Bank, seeking to hold the ANC to its own policy resolutions as it has done on EWC. Investor sentiment will take another knock.

On the economic pulse, forecasts for this year’s growth have been revised downward. We project a mere 0.5% growth overall by year end for 2018. Headline inflation is up from 4.8% in August 2017 to 4.9% in August 2018.

In the engine room, the Standard Bank PMI reflects the lowest point in 29 months. Watch unemployment in particular rising, abhorrently high by any EM standard. Eskom capacity remains weak.

Overall, talk on trade by the United States (US) may have had the effect of its top trading partners deepening trade elsewhere as a hedge. Internal political dynamics within Iran add to the difficulty of a new Iran deal.

On South Africa’s political landscape, President Cyril Ramaphosa (CR) has made clear he will not risk party unity, even if he is seen as weak. The hope that Expropriation Without Compensation (EWC) will be confined to agricultural land is misplaced. More Chinese intervention and influence can be expected.

In the policy landscape, an exemption from the National Minimum Wage (NMW) for some small- to medium-size firms appears to be ignored by bureaucrats.

We expect policy to continue reflecting wealth extraction over growth regardless of the deeper consequences for investor sentiment.

On the economic pulse, second quarter GDP growth is expected to disappoint and will take South Africa very close to recessionary territory, while calling Treasury growth forecasts into question.

In the engine room, unemployment and the burden on individual tax payers are rising, while household confidence is slipping.

South Africa’s new seat on the UN Security Council could be divisive if anti-Western sentiment is not reversed. Fallout for SA sectors and firms could be severe. On the domestic front, our call is that President Cyril Ramaphosa’s timidity of deep reform won’t change in the short to medium term, leaving structural problems intact. In the policy landscape, the minimum wage, healthcare and expropriation of property policy commitments reflect a penchant for ideologically based policy and political rhetoric without regard for economics. The economic pulse is dominated by negative first quarter GDP data, and the growth rate remains insufficient to address the current unemployment rate.

Young people remain SA’s political, economic, and social Achilles heel; the consequences of unemployment at over 50% and NEET rate at over 30% in an underperforming economy are compounded by poor education outcomes for most. We anticipate these dynamics will translate into populism and protest.

It notes that the CEO Confidence Index is up in the first quarter, driven by positive sentiment around Cyril Ramaphosa, but cautions that the rise is overdone, revealing a combination of ‘big-business’ political naiveté and lack of analytical rigour, and a near crippling climate of political correctness in public pronouncements. It highlights the possibility of an early (October-November) election, noting that some internal ANC hurdles prevent that at this time, but that if these are overcome the situation changes. The report anticipates little in the way of moves towards structural reform in areas from labour to healthcare, education, investment, entrepreneurship, and property rights, arguing that minimum wage laws will further price people out of work, and that property rights threats will stall much improvement in fixed investment levels.

The government is perceived to remain committed to State-driven redistribution over private sector-driven growth. The report asserts that SA could be set on a growth track to 5% if it introduced the right labour and education reforms, dropped the anti-investment and anti-West rhetoric, sold the parastatals, abandoned counterproductive racial engineering edicts, and secured property rights.

The report acknowledges positive perceptions following Cyril Ramaphosa’s presidential ascendancy, and the subsequent Moody’s decision to retain South Africa’s Baa3 rating while changing the outlook from negative to stable. However, it highlights the motion on expropriation as the country’s single greatest investment risk, coupled with the absence of indications of sufficient policy reform in the key areas of labour, mining and empowerment.

The report cautions that low Treasury growth projections, a failure to demonstrate fiscal discipline and undershooting on revenue collection collectively leave the way open to future rating downgrades. These risks are contrasted with the opportunity, through fundamental policy reform, to position South Africa as a more competitive emerging market capable of achieving a 5% economic growth rate.