WHY IS SOUTH AFRICA MISSING OUT ON GLOBAL GROWTH ?
Good times are here again...for some!
According to the world bank the global economic growth rate is expected to increase from 2.4% in 2016 to 2.9% in 2018. Growth is running above potential in the US, Japan and the eurozone, China beat expectations in the first half of this year, India has recovered from recent policy wobbles and even Russia and Brazil are out of recession... Unfortunately for South Africa, the economy is at a virtual standstill and is expected to grow 0.6% this year and 1.1% next year. Unless something dramatically positive happens, the 2010s will be second worst decade for growth in South Africa since World War II.
So, what on earth is going on?
South Africa is usually a strong beneficiary of global growth. A 1% increase in global growth translated into 0.94% growth in South Africa during the 20 year period leading up to 2016. However, the graph below shows that the pattern has recently broken down and since 2009 South Africa has significantly underperformed the world economy. The South African Reserve Bank has identified 5 economic factors that would have lead to growth of 2.1% in 2016 (vs. actual growth of 0.3%) if they had been different. Of these, confidence at 1.15% and commodity prices at 0.55% would have had the most impact. The bottom line is that in theory, South African growth in 2018 could be more than double the forecasted rate if we could remove political instability, policy uncertainty and state capture shenanigans.
Where to from here…
The ANC’s National Elective Conference, which runs from 16 - 20 December in Gauteng, is clearly critical. Most business people that we speak to believe that Zuma will step down and that if he is replaced by Cyril Ramaphosa it will be good for the economy, but that if he’s replaced by Nkosazana Dlamini-Zuma it will be bad. This is overly simplistic for a whole bunch of reasons. Former KZN Premier, Dr Zweli Mkhize, is emerging as an increasingly powerful “unity” candidate, but people don’t seem to be sure of whether to think of him as a reformed Zuma supporter or JZ’s secret weapon. It has also become fashionable for losing camps to rebel and there are at least 4 ANC provincial or regional elective conferences that are currently being disputed in court. If its certainty we’re after, we may not get it.
(World Bank, South African Reserve Bank, ANC, City Press, News 24)
WEEKLY MARKET UPDATE
South African tax revenue was R13bn behind target for the quarter ended 30th June. If trends continue, the budget deficit in March 2018 could be 4.5% compared to the planned 3.5%. This would result in government spending cuts that could lead to lower growth as there is limited room to increase taxes and government debt levels are already at unsustainable ratios. (South African Reserve Bank)
Foreign investors bought a net R18bn bonds in September, which is the highest inflow since March. Investors are attracted by SA’s high yields compared to emerging market peers and the benign inflation outlook. Foreigners now own nearly 50% of South African government debt. Nearly all South African bonds are issued in rands (as opposed to euros or US dollars). SA’s foreign currency debt has been downgraded to “junk”, but rand denominated bonds are still rated investment grade by Moody’s and S&P. (Bloomberg)
Strong economic data (US factory orders and jobless claims beat expectations) and progress on reforming the US tax code has lead to increased investor optimism about the global economy. The 3 main US stock market indices as well as MSCI’s index of stock markets in 47 countries reached record highs. Oil prices rose as it appeared that Saudi Arabia and Russia will limit production through next year. (Bloomberg, Reuters)
It’s basically like FC Barcelona vs. Real Madrid. Catalonia is a province in northeastern Spain that includes the city Barcelona. The region accounts for around 16% of Spain’s population and just over 20% of GDP. Catalonia has been a part of Spain since the 15th century, but has its own language (similar to southern French dialects), distinct cultural identity and high degree of political autonomy. On Sunday, 90% of voters voted “yes” in an independence referendum (42% turnout) that was deemed illegal by the national government in Madrid. The referendum was marred by scenes of police brutality and the outcome has spooked European financial markets. The key concerns around a “Catalexit” are that the region would automatically drop out of the EU and Spain would lose 20% of its economy. (The Guardian, BBC, The Independent)