THE SOUTH AFRICAN ECONOMY POSED FOR REVIVAL

Transcription

1 FIRST QUARTER 2019 ITRANSACT IS A LICENSED FINANCIAL SERVICES PROVIDER ITRANSACT ECONOMIC OUTLOOK THE SOUTH AFRICAN ECONOMY POSED FOR REVIVAL This installation of quarterly economic information is kindly provided by Pan African Research Services (Pty) Ltd, a subsiduary of Pan African Capital Holdings who the majority shareholder of the Itransact Investment Platform. RESEARCH TEAM Dr. Iraj Abedian - (Chairman of the Itransact Investment Platform Board) PhD (Econ), SFU, Canada, Chief Economist Nthabiseng Tsoanamatsie - M.Com (Econ), B.Com (Honours) Univ. of Pretoria, Senior Economist & Head of Research Hlompho Mphanje - M.Com (Econ), B.Com, Hon (Econ), Univ. of JHB Economic Analyst

2 CONTENTS SUMMARY AND ASSUMPTIONS 2 PART 1: ECONOMIC ACTIVITY 3 PART 2: GOVERNMENT INITIATIVES 4 PART 3: MANUFACTURING 5 PART 4: MINING & COMMODITIES 6 PART 5: SA INDUSTRY 6 PART 6: GROSS DOMESTIC EXPENDITURE 8 PART 7: EMPLOYMENT 9 PART 8: PRICES, INTEREST RATES AND EXCHANGE RATES 10 PART 9: FISCAL AND EXTERNAL ACCOUNTS 12 PART 10: FORECAST TABLE 14 DISCLAIMER 14 CONTACT DETAILS 14

3 EXECUTIVE SUMMARY AND ASSUMPTIONS South Africa s growth South Africa started 2018 on a high note and full of renewed optimism but ended the year on a more muted tone following another year of insipid economic metrics. GDP growth disappointed in H but recovered in Q3 with a 2.2% GDP growth. We expect another positive growth in Q4 2018, and for overall 0.8% GDP growth rate for Investment has been improving, particularly FDI, and this, along with other economic stimulus initiatives, will lead to improved growth in Manufacturing Manufacturing output grew positively during both ober and November Also, PMI finally moved to the expansionary territory in December We therefore expect the manufacturing sector to add positively towards GDP during Q Households Domestic demand rebounded in the third quarter of Real final household consumption recovered in Q3, and monthly retail sales increased in ober and November 2018, respectively. These, along with the fact that there has only been one quarterly contraction in real final household expenditure since 2010, leads us to expect an increase in this metric in the fourth quarter of Investment has been improving, particularly FDI, and this, along with other economic stimulus initiatives, will lead to improved growth in Employment December 2018 s PMI revealed what could possibly be an early effect of SA s Minimum Wage Act. The employment sub-index of PMI deteriorated, falling deeper into the contraction territory, and indicating that manufacturers expect to employ less people. The value for December was also the lowest recorded since Hence, from the results, we expect employment in the manufacturing sector to suffer in the near term. The rand, inflation & interest rates Consumer inflation moderated to 4.5% y/y - the Reserve Bank s inflation target range s mid-point in December This was following an interest rate hike of 25 basis point in November. Our inflation outlook has improved, and we expect the Reserve Bank to leave interest rates unchanged in March 2019, and possibly until the post-may 2019 national elections. Fiscus We make the market simple There has been a slippage in fiscal projections mainly as the result of the low growth environment and the resultant revenue shortfalls. South Africa has higher levels of debt as well as a larger budget deficit. The upcoming 2019 Budget to be presented by the Finance Minister in February (20th) is important and will reveal whether or not the fiscus will make a positive turnaround. Moody s will also likely give its assessment of SA s sovereign credit following the Budget presentation. 2

4 PART ONE: ECONOMIC ACTIVITY South Africa started 2018 on a high note and full of renewed optimism but ended the year on a more muted tone following another year of insipid economic metrics. At the beginning of 2018, the Q4 GDP data released in March 2018 showed that quarterly GDP growth for the last quarter of 2017 had been 3.1%, a rather decent growth rate that was preceded by two quarterly growth rates above 2%. GDP growth rate, however, contracted during the first two quarters of 2018, as headwinds, particularly those originating locally, battered South Africa s economy, resulting in a technical recession. Nevertheless, GDP growth rebounded during the third quarter of 2018 as GDP recorded a quarter-on-quarter growth rate of 2.2%. The 2.2% recovery, however, is not that impressive when looking at the actual real GDP numbers. During the last quarter of 2017, real GDP recorded approximately R3 157 billion, but this fell to R3 136 billion and R3 134 billion in Q and Q2 2018, respectively. Although real GDP rose from R3 134 billion in the second quarter of 2018 to R3 150 billion in the third quarter (and therefore recording an annualized quarterly growth rate of 2.2%), the third quarter real GDP value was still less than that recorded in the fourth quarter of This means the South African economy s GDP was less than it was in the third quarter of 2018 than it was during the last quarter of All this is clearly demonstrated in Graph 1. Real quarter-on-quarter GDP growth rate (R millions), Q Q ,200,000 3,180,000 3,150,000 3,100,000 3,160,000 3,050,000 3,140,000 3,000,000 2,950,000 3,120,000 2,900,000 2,850,000 3,100,000 2,800,000 3,080,000 2,750,000 2,700,000 i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii 3,060,000 i ii iii iv i ii iii Source: Stats SA 2019, Note: Seasonally adjusted and annualized 3

5 PART TWO: GOVERNMENT INITIATIVES Some major developments initiated by the government that will have significant impact on the South African economy took place during the last quarter of 2018, and two stand out. The first one was the country s inaugural Investment Summit, a Summit that followed from President Ramaphosa s commitment during his first State of the Nation Address in the beginning of 2018 and was held during end-ober (see our Report on. 27th, 2018). This was done in efforts to boost the weak investment that has resulted in the flagging economic growth. Previously, President Ramaphosa had made it known that his aim was to raise $100 billion in investments over a period of five years in order to accelerate growth. It was encouraging then, when, at the end of the Summit, he declared it a success. Numerous investment pledges were made during the Summit, and in total, R290 billion in investment pledges was made. Over and above the amounts pledged, the Investment Summit cemented the new administration s intentions of working together with business for the greater good of the country and went a long way in boosting business confidence by tackling investor negativity. In its 2019 elections manifesto, the governing African National Congress (ANC) aligned itself with President Ramaphosa s investment plans for the country, including pushing for increased investment as a tool to promote job creation. It therefore indicated that it wants to increase investment levels by R1.2 trillion over the next four years. The ANC in its manifesto promised that by working with all social partners and by ensuring policy consistency and certainty, the ANC will intensify its efforts to restore investor, business and consumer confidence. The second development was the announcement and gazetting of South Africa s Minimum Wage Bill. Subsequent to being gazetted during end-november, President Cyril Ramaphosa presented the Wage Bill on Dec. 7th, announcing that it would take effect from. 1st, 2019 (see our Report on Dec. 11th, 2018). As things stand, it is not clear what the impact of the Wage Bill will be on the South African economy. Evidence on the effect of national wages is often mixed and depends on country-specific characteristics. In South Africa s case, there is currently no consensus with regard to the job losses that will result from the implementation of the Minimum Wage Act, if any. Nevertheless, as President Ramaphosa also pointed out, higher demand and greater consumption are expected to result from the higher income, which will in turn possibly lead higher economic growth and more jobs. Nevertheless, December 2018 s PMI revealed what could possibly be an early effect of SA s Minimum Wage Act. Even though overall PMI performed better than it had in a long-time during December 2018, this was not the case for the employment sub-index of PMI. The employment sub-index deteriorated from 43.5 index points to 40.5 points. This means the sub-index fell deeper into the contraction territory, indicating that manufacturers expect to employ less people, hence, from the results, we expect employment in the manufacturing sector to suffer in the near term. This value for December was also the lowest recorded since 2014 as Graph 2 indicates. Interestingly enough, this took place shortly after the Minimum Wage Act was published and announced by President Ramaphosa. Yet, even though this correlation of events does not necessarily mean the Minimum Wage Act caused the dip in PMI s employment sub-index it is still a possibility. 4

6 PMI employment sub-index, 2010 Dec ,0 53,0 51,0 49,0 47,0 45,0 43,0 41,0 39,0 37,0 35, Source: BER 2019 PART THREE: MANUFACTURING Manufacturing output grew by 1.1% m/m and by 0.7% m/m during ober and November 2018, respectively. Although overall PMI began the quarter at a low 42.4 index points in ober 2018, it rose to 49.5 points in November, and finally moved to the expansionary territory in December 2018 when it registered 50.7 index points. The December PMI value then points to manufacturing having registered a somewhat healthy growth during the month, which, together with the other months growth, is likely to have resulted in overall quarter-on-quarter growth for the sector being positive for the fourth quarter of During the third quarter of 2018 manufacturing increased by 7.5% q/q, following a 0.6% q/q increase in the second quarter. Part of this was due to stronger export demand on the back of the weaker rand that boosted the production of motor vehicles, parts and accessories. Purchasing managers index (PMI), Dec Feb Mar May Jun Aug Sep Nov Dec INDEX Source: BER

7 PART FOUR: MINING & COMMODITIES Still on the supply-side of the economy, mining production increased by 3% m/m in ober but declined by 5.8% m/m in November Despite the somewhat warmer reception of the new Mining Charter, there are still some issues that South African mining companies as represented by the Minerals Council South Africa are not fully happy with, such as the 10% free carry (see our. 3rd Report). Nevertheless, government has been engaging with stakeholders and there appears to be a new level of trust emerging that could lead to improved confidence. For instance, the Minister of Mineral Resources Gwede Mantashe, met with the Minerals Council during end-ober Following the meeting, this is what the Council s CEO said, we welcome Minister Mantashe s sincere commitment to working with the industry to ensure that our industry regains its rightful position as a key flywheel to the engine of the economy. The mining sector is still facing serious headwinds, however, and this is why it contracted by 8.8% q/q during the third quarter of 2018 following an increase of 8.1% q/q in the second quarter. The IMF has indicated that there has been a slight softening of prices of certain commodities including those of metals, and this is not good for the sector. Furthermore, with China s economy having slowed down in 2018 and with further concerns regarding its economy due to factors such as the trade disputes with the US, commodity prices could weaken further to the detriment of the South African mining sector. PART FIVE: SA INDUSTRY On the local front, South Africa once again experienced electricity cuts during the last quarter of 2018, implemented by Eskom the still embattled state electricity provider, on whom the majority of the country depends. This is likely to have negatively affected production. What s more, the resultant uncertainty around electricity supply could have also had a negative effect on sectors like manufacturing and mining, along with the rest of the economy. Despite power cuts not having occurred in a number of weeks now, and the utility s group chief executive Phakamani Hadebe having assured the nation that Eskom has put in place a Nine Point Recovery Plan to address key operational challenges, this will take a considerable amount of effort as well as money because of the financial and operational difficulties Eskom currently faces. Except for mining, construction and electricity that grew negatively (construction: -2.7% q/q, electricity: -0.9% q/q), all the other major sectors of the economy grew positively during the third quarter of These include the already mentioned manufacturing, transports (5.7% q/q), trade (3.2% q/q), finance (2.3% q/q), government (1.5% q/q) and personal services (0.7% q/q). Agriculture also rebounded by 6.5% q/q following two quarterly declines (Q1: -33.6%, Q2: -31.9%). Estimates by the department of Agriculture, Forestry and Fisheries Crop Estimates Committee shows an increase of 5.6% of maize planted during the 2018/19 season, and a 21.3% increase in the production of wheat. We therefore expect agriculture to have grown positively during the fourth quarter of 2018, and to perform relatively well in the beginning of

8 Growth rates in industry value added and GDP (Q/Q percentage change), Q Q GDP at market prices Manufacturing 6,0 5,0 4,0 3,0 2,0 1,0 0,0-1,0-2,0-3,0 i ii iiiiv i ii iiiiv i ii iiiiv i ii iiiiv i ii iiiiv i ii iiiiv i ii iiiiv i ii iiiiv i ii iii 15,0 10,0 5,0 0,0-5,0-10,0 i iii i iii i iii i iii i iii i iii i iii i iii i iii Mining Agriculture 40,0 30,0 20,0 10,0 0,0-10,0-20,0-30,0 i iii i iii i iii i iii i iii i iii i iii i iii i iii 50,0 40,0 30,0 20,0 10,0 0,0-10,0-20,0-30,0-40,0 i iii i iii i iii i iii i iii i iii i iii i iii i iii Source: Stats SA, Note: Seasonally adjusted and annualized 7

9 PART SIX: GROSS DOMESTIC EXPENDITURE Domestic demand too rebounded in the third quarter of 2018, increasing by 0.4% q/q from -0.6% q/q in the second quarter. Real final expenditure by government increased from 0.8% q/q to 2.2% q/q, while real final household consumption went up by 1.6% q/q from -1.1% q/q. Monthly retail sales increased by 1.0% and by 3.3% in ober and November 2018, respectively. South Africa has gotten used to Black Friday sales with numerous retailers offering specials, and these contributed significantly to retail sales especially in November. For instance, it is estimated that SA consumers spend a total of R2.9 billion on 2018 s Black Friday, a 15.9% growth from However, new vehicle sales contracted, month-on-month, in two months during the fourth quarter. Nevertheless, the high frequency retail sales figures, along with the fact that there has only been one quarterly contraction in real final household expenditure (in 2013) since 2010, leads us to expect an increase in this metric in the fourth quarter of After increasing by only 0.4% q/q in 2017, gross fixed capital formation declined for the third consecutive quarter during Q3 2018, recording -5.1%. Notwithstanding these less than palatable figures, a new report by the United Nations Conference on Trade and Development (UNCTAD) paints a much encouraging picture. It reports that South Africa was one of the biggest recipients of Foreign Direct Investment (FDI) in Africa in Having registered steep declines in FDI inflows since 2014, South Africa recorded a marked recovery in 2018, with FDI inflows of USD 7.1 billion, compared to USD 1.3 billion in This was driven by investments in mining, petroleum refining, food processing, renewable energy and information and communication technologies. This is good, especially since FDI is normally more productive in nature, and this will surely boost the country s economy. It is also less temperamental than portfolio investment, and the fact that it is increasing is welcomed especially during the uncertainty created during the lead up to the general elections of May This is perhaps also a strong confirmation of rising confidence in South Africa. Gross domestic expenditure components (Q/Q percentage change), Q Q i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii Final consumption expenditure by households Final consumption expenditure by general government Gross fixed capital formation Source: Stats SA, Note: Seasonally adjusted and annualized 8

10 PART SEVEN: EMPLOYMENT Chronically high unemployment rates have been the bane of the South Africa s democratic government since This is why President Ramaphosa initiated the Jobs Summit together with social partners that was held in early-ober in order to find ways of better tackling the problem. The country s unemployment rate is currently at 27.5% (Q3 2018). Structural issues such as the poor public education system need to be addressed before any real impact on employability and unemployment can be made. Chronically high unemployment rates have been the bane of the South Africa s democratic government since Unemployment rate, Q Q ,0 27,0 26,0 25,0 24,0 23,0 22,0 21,0 i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii iv i ii iii Source: Stats SA

11 PART EIGHT: PRICES, INTEREST RATES AND EXCHANGE RATES The SA Reserve Bank Governor on announcing the decision of the Monetary Policy Committee to hike interest rates by 25 basis points in November 2018 (to 6.75%) stated that the Bank s monetary policy stance is to focus on anchoring inflation expectations near the mid-point. Just a day prior to this announcement, November inflation numbers had been released and showed that CPI had accelerated to 5.2% y/y from 5.1% y/y in ober. This obviously was indicating a move away from the mid-point as the target range is between 3% and 6%. The Bank had also noted some inflation pressures, hence the decision to increase the repo rate. This strategy appears to have worked since, when the December 2018 inflation metrics were released by Statistics South Africa on. 23rd, 2019, they indicated that consumer inflation had not only decelerated, but CPI had registered 4.5% q/q, exactly at the target range s mid-point. The increased interest rates in November 2018, along with the marked fuel price declines have been the main contributors to the moderation in the inflation rate. The deterioration in international oil prices since the fourth quarter of 2018 have led to the lowering of local fuel prices. Petrol price inflation had steadily been rising especially since il 2018, and saw steep rises from June, recording a high of 25.3% in y. In December, petrol price inflation decelerated to 8.7% y/y from 23.1% y/y in November. The trend of falling fuel prices has continued into the new year, hence we expect it to continue exerting downward pressure on inflation. South Africa s economic woes were the major contributor to the rand weakening from around March 2018, with the pronounced turn in sentiment against the emerging market group particularly from around August during the peak of Turkey s economic troubles leading to steep depreciation as well as high volatility of the South African exchange rate. The ongoing trade policy disputes as well as the slowing global economy (the IMF has recently downgraded its forecast for global growth for 2019 from 3.7% to 3.5%), are also negatively impacting emerging markets and their currencies. Nevertheless, with the US Federal Reserve Bank having signaled a more gradual pace of rate hikes forecasting two rate hikes for 2019 instead of the previous three, as well as the European Central Bank indicating its monetary policy would remain largely accommodative, this offers some reprieve for emerging markets in terms of impact on capital flows and their currencies. The Reserve Bank s MPC left interest rates unchanged at 6.75% during its. 17th, 2019 meeting. And though in November it had indicated that it expected 4 rate hikes of 25 basis points, with the repo reaching 7.5% by end of 2020, the new developments led to the Governor announcing in uary that the Bank now expects one hike of 25 basis points, with the repo reaching 7% by end of He did, however, emphasize that any monetary policy decisions going forward will be data dependent. We expect the Reserve Bank to keep interest rates unchanged at 6.75% during the MPC s next meeting in end-march and possibly beyond that until the national elections have come and gone. 10

12 Headline CPI and transport inflation, Dec ,0 6,0 25,0 5,0 20,0 4,0 15,0 3,0 10,0 2,0 5,0 1,0 0,0 Feb Mar May Jun Aug Sep Nov Dec CPI (RHS) Transport inflation Petrol inflation 0,0 Source: Stats SA 2018 The South African exchange rate, R/$ R/ R/ Source: IHS 11

13 South African interest rates, 2018 Aug ,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 0,00 12,00 10,00 8,00 6,00 4,00 2,00 0,00 Repo rate (LHS) Prime overdraft rate Source: SARB 2019 PART NINE: FISCAL AND EXTERNAL ACCOUNTS South African government finances are not in a good shape, and testament to this was the rand s depreciation following ober 2018 s Medium Term Budget Policy Statement, as the market reacted negatively to the mini Budget. On top of this, Moody s rating agency also rated the Budget as credit-negative. This was because Finance Minister Tito Mboweni s Budget had revealed an even weaker fiscal outlook than had been the case during February 2018 s main Budget. For starters, the National Treasury had forecasted a GDP growth rate of 1.5% for 2018 during the February Budget, but this was revised down to 0.7% during the ober mini Budget. This will of course negatively impact government revenue, which means a worsening of the fiscal status. Nonetheless, Moody s still has South Africa s long-term debt under investment grade. Ultimately, the only meaningful way that South Africa s fiscus is to recover is through the improved and sustained economic growth. There has been a slippage in fiscal projections mainly as the result of the low growth environment and the resultant revenue shortfalls. South Africa has higher levels of debt as well as a larger budget deficit, and this is despite the tax increases that were announced during the February 2018 Budget, that saw amongst others, the increase of value added tax from 14% to 15%. Nevertheless, the upcoming 2019 Budget to be presented by the Finance Minister in February is important and will reveal whether or not the fiscus will make a positive turnaround. Moody s will also likely give its assessment of SA s sovereign credit following the Budget presentation. Another major risk to the fiscus remains the embattled state-owned entities (SOEs), despite the Ramaphosa administration taking a number of steps to strengthen governance at the entities. The National Treasury has indicated that several of the SOEs with severe financial difficulties do not have enough cash to repay debt falling due. At the same time, Treasury has also stated that almost half of the total SOE debt is guaranteed by the government, with the combined liabilities of national public entities as well as SOEs totaling R1.6 trillion (in 2016/17). 12

14 Debt maturity profile of large state-owned company borrowers Foreign debt Domestic debt Government guaranteed debt R billion / / / / / / / / / / / / / / / /34 Source: National Treasury as at 30 June 2018 In the third quarter of 2018, South Africa s current account recorded a deficit of R177 billion, following deficits of R167 billion and R219 billion in the second and first quarter, respectively. This means that as a percentage of gross domestic product (GDP), the current account deficit widened marginally to 3.5% in the third quarter from 3.4% in the second quarter. The surplus on the trade account fell to R14 billion in the third quarter of 2018 from R38 billion in the second quarter, as a result of the value of merchandise imports increasing more than that of merchandise and net gold exports. On the other hand, the shortfall on the services, income and current transfer account narrowed in the third quarter of 2018 (R191 billion vs. R206 billion in the second quarter) on the back of an improvement in the deficit on net income and current transfer payments. Therefore, the net effect of these two accounts (the trade account as well as the services, income and current transfer account) caused the current account deficit to widen (as mentioned in the first paragraph above). Despite the rand weakening against the dollar in all three months of the third quarter of 2018 (averages: R13.42 in y, R14.42 in August and R14.79 in September), the value of exports only increased in August 2018 (9.3% m/m vs. -2.9% m/m in y and -3.4% m/m in September 2018). Indeed, the slowdown in the global growth brought about by the effect of trade disruptions (protectionism) has put pressure on total domestic demand, therefore on exports. The trade balance recorded a deficit of R-4.29 billion in ober 2018 and a surplus in November of R3.49 billion. Although the steep decline in international oil prices are likely to have moderated the value of imports from November, commodity prices have remained flat, while electricity supply disruptions could have negatively impacted exports. We therefore do not expect the current account to have improved in the fourth quarter of

15 PART 10: ECONOMIC FORECAST TABLE VARIABLE UNIT Population Million Real GDP Per cent, growth * % Unemployment Per cent of labour force * Headline Inflation Per cent (avg) Repurchase (repo) rate Per cent (avg) Current Account Deficit Per cent of GDP * National Government Deficit Per cent of GDP * Source: PAIRS, SARB, Stats SA 2018, Note: eop : end of period; avg : average; * Estimate CONTACT DETAILS 1st Floor, Summit Square 15 School Road Morningside, Sandton 2196, South Africa Postnet Suite #42 Private Bag X51 Rivonia 2128 T: E: enquiries@pan-africanresearch.co.za DISCLAIMER The information and opinions contained in this report have been obtained from public sources believed to be reliable, but no guarantee is made that such information is accurate or complete. All estimates and opinions included in this report constitute our judgements as of the date of this report. Analysis, statistics and opinions contained in the report are published for the assistance of recipients, but by no means should be taken as a substitute for the exercise of judgement by any recipient. Clearly, they are subject to change without notice. Pan-African Investment and research Services (Pty) Ltd. does not accept any liability whatsoever for any direct or consequential loss arising from any use of material contained in this report. This report is for the use of intended recipients and may not be reproduced [in whole or in part] or delivered or transmitted to any other person without the prior written consent of Pan-African Investment and Research Services (Pty) Ltd. 14