Moody s Baa2 / S&P BBB- / Fitch BBB- 1 Economy: Agriculture 2%, Industry 29%, Services 69%

Transcription

1 South Africa Summary Moody s Baa2 / S&P BBB- / Fitch BBB- 1 Economy: Agriculture 2%, Industry 29%, Services 69% South Africa is much more advanced than most sub-saharan African countries: its economy is more diversified and it has solid economic pillars in the central bank, the treasury, and the banking system. However, economic growth has slowed as a result of a political crisis and structural weaknesses which President Jacob Zuma has been unwilling to address. The ruling African National Congress (ANC) is deeply divided and its popularity is on a downward trajectory. In December, Cyril Ramaphosa defeated the ex-wife of President Zuma in a vote for the ANC s next party leader. The main challenge for Ramaphosa will be to unite the ANC and move forward with reforms and economic adjustments. Market participants will now shift their focus to the 2019 general election and whether the ANC and its new leader will retain power. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 6,923 6,535 5,822 5,368 5,322 5,411 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of Imports) Foreign Reserves (% of GDP) As of November Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Citibank, Haver Analytics, IMF 659

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency A Local Currency AA- A- A+ BBB+ A BBB BBB- BB+ BB A- BBB+ BBB BBB- BB+ BB BB Moody s S&P Fitch Moody s As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s S&P Fitch Bond Spreads Local Yield South Africa 2012 EMBIGD South Africa 2012 GBI-EM Global Div As of December Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 660

3 South Africa Strengths Economic Policies and Rule of Law South Africa s economic management remains relatively solid and predictable although it seems to be gradually changing for the worse. The treasury, the reserve bank, and the banking supervision authority are considered the three pillars of the economy. They are sound, transparent institutions run by capable technocrats. Business conditions are currently friendly as South Africa ranks 74 th out of 190 countries on the World Bank s Ease of Doing Business Index. 2 Wealth, Infrastructure, and Resources Within sub-saharan Africa, South Africa is one of the wealthiest countries and has the strongest institutions and best infrastructure. GDP per capita was triple the average of the region as of the end of The country s infrastructure is by far the best in the region but is still in need of significant improvement. South Africa is also rich in natural resources with mining reserves and production among the best in the world. 4 Location South Africa benefits from its location and trade flows with high growth sub-saharan countries. According to the International Monetary Fund s World Economic Outlook, sub- Saharan Africa is going to be by 2022 the second-fastest growing region in the world after Asia. 5 Many international companies, including a number of firms in the retail, manufacturing, and banking sectors, are expanding in the region and have set up regional headquarters in South Africa. As a result, exports to the sub-saharan region are growing in importance, totaling close to 30% of total exports as of mid Weaknesses Low Growth Persistently low economic growth is one of South Africa s main weaknesses. Since 2010, the economy has grown at an average rate of 1.9%, well below the average of emerging markets countries. This has been driven by a number of structural factors, including low and declining levels of investment and a shortage of skilled labor due to the low quality of education. Meanwhile, the labor costs are high as unions hold significant power and continue to demand wage increases that exceed inflation and productivity gains. Poor Social Conditions South Africa s social conditions and income distribution have only improved marginally over the past 15 years. The ANC, which came into power in the 1990s, has tried to solve these issues, but with little success, in part due to internal divisions within the ANC itself. Unemployment is very high at roughly 28%. South Africa also suffers from social inequality and disparate income distribution, which are some of the worst in the world. South Africa ranks 118 th out of 187 countries, below other Sub-Saharan countries such as Botswana and Gabon, on the Human Development Index. 7 and ranks 135 th out of 136 countries on the Gini Index, which is a measure of income distribution. 8 ANC Internal Dispute The ANC tripartite alliance is deeply divided, with one camp supporting Zuma and the status quo, and the other supporting economic reform. Meanwhile, a lack of social progress 661

4 Lazard Emerging Markets Debt is affecting the popularity of the ANC which suffered disappointing results in local elections in 2016, losing key municipalities and regions. There is a possibility that the ANC loses the 2019 general elections given the decline of its popularity and its internal division. The good news is that Ramaphosa won the ANC elections and that he might be able to tackle the economic and corruption problems. However, the top six decision makers of the ANC are divided with half supporting Ramaphosa and the other half Zuma. Ramaphosa is likely to become South Africa s new president well before the next elections assuming Zuma steps down as he is likely to be recalled from his position. High Fiscal Deficit and Growing Public Debt The government s balance sheet is not as strong as it was five years ago, leaving less room for the government to adjust to an external or domestic shock with fiscal policy. The government continues to increase spending on social programs and wages, leaving less room to increase the investment needed improve economic growth. Meanwhile, government revenue has disappointed causing the government to revise the fiscal deficit higher during the last couple of years. In October as part of the Medium-Term Budget Policy Statement, the government revised upward its /2018 fiscal forecast from 3.1% of GDP to 4.3% of GDP and stabilizing at 3.9% in 2018/2019. More concerning is the government s debt forecast of 60% by 2020/2021 from current levels of slightly above 50% and below 30% of GDP in The main risk would be a negative impact on revenues or absorbing contingent liabilities of the public companies such as the public utility Eskom which have weak balance sheets or South African Airways. Wide Current Account Deficits Export competitiveness issues, low national savings, and a deterioration in the terms of trade partially reversed in and have resulted in a persistently high current account deficit (CAD) of almost 5% of GDP, although the economic slowdown has contributed to a marginal improvement of around 3% of GDP. Foreign direct investment (FDI) inflows remain limited; thus, the financing of the current account is more dependent on portfolio flows. Additionally, foreign reserves are relatively low compared to external funding needs. While external debt is still moderate at 54% of GDP, it has been rising steadily from less than 30% of GDP at the end of Monetary and Exchange-Rate Policy Inflation and Monetary Policy The South African Reserve Bank (SARB) has operated under an inflation-targeting regime since February The central bank targets headline CPI within the 3% 6% range over a 12-month period. As a secondary objective, the SARB aims to support growth and promote financial stability. Monetary-policy implementation: The SARB uses cash reserve requirements and a 7-day repurchase agreement, or repo rate (at the policy-rate level), to manage banking system structural liquidity. In addition to the latter, the central bank also provides overnight liquidity to banks through supplementary repos and through an automatic standing facility that lends/ borrows 100 basis points above/below the policy rate. Finally, a range of open-market operations are also conducted to give effect to the SARB s monetary policy stance. The 12-month headline inflation has printed close to the upper bound of the SARB s tolerance range over a five year period through September (avg: 5.7%, min: 4%, max: 662

5 South Africa 7%). Core inflation has averaged 5.3% in the same period. As of September, headline inflation was slightly above the 4.5% midpoint target at 5.1% with core inflation close to the target at 4.6%. We expect headline CPI to stay in the 4.5% 5.5% range through the end of The output gap at -1.7% (unemployment rate at multi-year highs ~ 27%), slower wage gains (unit labor costs growing below 6%), and a well-behaved currency suggests little demand or cost pressures. Inflation expectations (5.8% 12 months ahead) and service inflation (5.75%) remain sticky above 5% which should partially offset those downward pressures. The ZAR dynamic going forward is always a source of uncertainty for inflation forecasts. The SARB eased its policy rate to 6.75% from 7.0% in (through September). In real terms (policy rate deflated by the 12-month CPI), the policy rate is at 2.1%, 150 basis points above its 5-year average. If ANC s December conference proves conducive for fiscal consolidation, the central bank may extend the easing cycle and move the repo rate lower towards 6% by midyear Exchange-Rate Policy and Outlook The ZAR is a convertible, freely floating currency. The SARB has intervened in the past with the goal to accumulate reserves. Since 2010 a period marked by ZAR depreciation SARB has refrained from intervening in the foreign-exchange market. South Africa s international reserves in September stood at US$42 billion. External imbalances should improve slightly in The current account deficit should consolidate around -2.5% of GDP. Financial flows in the base case that the ANC conference improves the reform outlook for the economy should get a boost from FDI on top of strong portfolio flows. South Africa s basic balance deficit narrowed to 3.2% of GDP (through 2Q versus 5% t-12) but remains a source of vulnerability to global markets gyrations. The improvement was due to a lower current account deficit. The CAD narrowed to 2.4% of GDP (through 2Q versus 4.5% t-12). The trade balance turned into surplus (0.7% of GDP) as economic growth remains lackluster. The turnaround over the past 12 months goes beyond the improvement seen in 2016 that was mostly oil related. The primary income deficit has also narrowed, in part due to the appreciation of the Rand. The financial account continues to rely on hefty portfolio inflows with net outflows in the direct investment account.. The EU Represents 27% of South Africas Trade; China 19%; United States 12%; Japan 8% Following the global financial crisis, the USD-ZAR exchange rate reached a high of in January Over the past 12 months, it has traded in a narrower range. The ZAR real effective exchange rate (REER) adjusted for terms of trade is currently 3.5% below its 5-year average. Taking into account the increase in unit labor costs over the period (14.5% above the five-year average) the REER looks fairly valued. Structurally we would expect the ZAR to trade at cheap to fairly valued given the low growth/low savings equilibrium. 663

6 Lazard Emerging Markets Debt Inflation 8.0 USD/ZAR Inflation Reference Rate As of December Source: Bloomberg REER REER Median since Dec 1999 Median last 10 yrs Median last 5 yrs As of December Source: JP Morgan, Lazard 664

7 South Africa Country Background Size 1,219,090 KM 2 (26th) Capital Pretoria Population 54.8 Million Religion Protestants 36.6%, Catholic 7.1%, Muslim 1.5%, Christian 36.0%, Other 18.8% Median Age 27.1 Years Literacy Rate 94.4% Independence 31 May 1910 Political System Parliamentary Republic Government Leadership President Jacob Zuma Presidential Election 2019 Legislative Branch Bicameral Parliament Economy Agriculture 2.4%, Industry 29.0%, Services 68.6% Labor Force Agriculture 4.6%, Industry 23.5%, Services 71.9% Merchandise Exports Gold, Diamonds, Platinum, Other Metals and Minerals, Machinery and Equipment Export Partners China 9.2%, Germany 7.5%, United States 7.4%, Botswana 5%, Namibia 4.8%, Japan 4.6%, India 4.3%, United Kingdom 4.2% Currency Rand (ZAR) As of November Source: CIA 665

8 Lazard Emerging Markets Debt Country Timeline 1934 The Union of South Africa parliament enacts the Status of the Union Act, which declares the country to be a sovereign independent state. The move followed from Britain s passing of the Statute of Westminster in 1931, which removed the last vestiges of British legal authority over South Africa Policy of apartheid (separateness) adopted when National Party (NP) takes power Population classified by race. Group Areas Act passed to segregate blacks and whites. Communist Party banned. ANC responds with campaign of civil disobedience, led by Nelson Mandela South Africa declared a republic, leaves the Commonwealth. Mandela heads ANC s new military wing, which launches 1964 ANC leader Nelson Mandela sentenced to life imprisonment FW de Klerk replaces PW Botha as president, meets Mandela. Public facilities desegregated. Many ANC activists freed ANC unbanned, Mandela released after 27 years in prison. Namibia becomes independent Start of multi-party talks. De Klerk repeals remaining apartheid laws, international sanctions lifted. Major fighting between ANC and Zulu Inkatha movement ANC wins first non-racial elections. Mandela become president, Government of National Unity formed, Commonwealth membership restored, remaining sanctions lifted. South Africa takes seat in UN General Assembly after 20-year absence Government approves major program to treat and tackle HIV/Aids. It envisages network of drug-distribution centers and preventative programmes. Cabinet had previously refused to provide anti-aids medicine via public health system President Mbeki sacks his deputy, Jacob Zuma, in the aftermath of a corruption case. Around 100,000 gold miners strike over pay, bringing the industry to a standstill Corruption charges against former deputy president Zuma are dismissed, boosting his bid for the presidency Hundreds of thousands of public-sector workers take part in the biggest strike since the end of apartheid. The strike lasts for four weeks and causes widespread disruption to schools, hospitals and public transport. Zuma is elected chairman of the ANC, placing him in a strong position to become the next president. Prosecutors bring new corruption charges against him A judge throws out a corruption case against ruling ANC party chief Jacob Zuma, opening the way for him to stand as the country's president in President Mbeki resigns over allegations that he interfered in the corruption case against Mr Zuma. ANC deputy leader Kgalema Motlanthe is chosen by parliament as president. A new political party is launched in Bloemfontein, in the first real challenge to the governing ANC. The Congress of the People or Cope is made up largely of defectors from the ANC and is headed by former defence minister Mosiuoa Lekota Parliament elects Jacob Zuma as president. Economy goes into recession for first time in 17 years The ANC suspends its controversial and influential youth leader, Julius Malema, for five years for bringing the party into disrepute. National Assembly overwhelmingly approves information bill accused by critics of posing a threat to freedom of speech. The ANC says it is needed to safeguard national security Former ANC youth leader Julius Malema is charged with money laundering over a government tender awarded to a company partly owned by his family trust. Mr Malema says the case is a politically motivated attempt to silence his campaign against President Zuma, in particular over the Marikana shootings. President Zuma re-elected as leader of the ANC. 666

9 South Africa 2013 Nelson Mandela dies, aged 95. Tributes to the father of the nation flood in from throughout the world. The anti-corruption ombudsman heavily criticises President Zuma for a twenty million dollar upgrade to his private home Ruling ANC party wins a majority in general elections President Zuma announces plans to limit farm sizes and ban foreign farmland-ownership in an attempt to redistribute land to black farmers a longstanding ANC pledge. Power utility Eskom rations electricity to prevent power cuts, blaming years of poor maintenance Supreme Court rules President Zuma violated the constitution for not repaying public money used to improve his private residence. President Zuma dismisses widely respected Finance Minister Pravin Gordhan, leading to the country s credit rating being cut to junk status. President Zuma survives his eighth motion of no-confidence. Source: BBC Notes 1 As of December. 2 Economy Rankings, Doing Business, accessed on 10 September, rankings. 3 As of December, Source: Haver. 4 Yager, Thomas R., Mineral Yearbook South Africa, U.S. Geological Survey, July 2013, gov/minerals/pubs/country/2011/myb sf.pdf 5 World Economic Outlook: Legacies, Clouds, Uncertainties, International Monetary Fund, October 2014, accessed on 6 December 2014, 6 As of October. Source: Haver Analytics. 7 United Nations Development Programme, accessed on 9 October 2015, 8 World Development Indicators: Distribution of income or consumption, The World Bank, accessed on 9 October 2015, 667

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