RMB Economics A point of view

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1 RMB Economics A point of view 6 December 2012 Analyst Another challenging year ahead Ettienne le Roux Chief Economist ettienne.leroux@rmb.co.za The legacy of Marikana and the impact of ongoing strikes and protests will weigh on the economy in Also, there is limited room for policy makers to offset the blow of any adverse internal or external shocks, as the year will start with a large current account deficit, a notable budget shortfall and already record low interest rates. Another tough year lies ahead on most fronts. (This article was last published in the Financial Mail: 2013 Outlook edition of December 6th) Spending under pressure Corporate fixed investment, which had only just started to recover from the recession of 2009, will continue to reflect the damage to business confidence by the strikes and labour unrest, as well as the lingering uncertainties about the direction important aspects of economic policy is going to take. Given the adversarial labour relations environment, much of whatever new investment companies undertake will mainly be in labour-saving machinery and technology Given the adversarial labour relations environment, much of whatever new investment companies undertake will mainly be in labour-saving machinery, capital goods and technology. The large pay settlements unions have been (and may continue to be) successful in obtaining will darken the employment picture even further. Meanwhile, rising food inflation combined with further sharp increases in administered prices are bound to reflect in at least somewhat higher inflation, and so weaker growth in real disposable income. Besides, unsecured credit, which up to now has buoyed the spending of particularly low income groups, is unlikely to be as readily available in 2013 as regulators and policy makers keep a more watchful eye. The difficult position households find themselves in is compounded by the fact that despite record low interest rates, certain segments of the population are struggling to service an ever-growing debt load. As it is, most households continue living beyond their means and, over the next few years, will have to deleverage, at least slowly. Large imbalances South Africa today has one of the largest current account deficits among emerging market economies. The problem is that external deficits must be financed. If labour and social unrest persist and uncertainty about the future policy direction in South Africa lives on, it will become ever more difficult to attract the foreign investment required to cover the shortfall. Any adverse political or economic news, or unexpected events, could therefore send the rand even lower. As the inflation rate will already start 2013 close to the top end of the 3% to 6% target range, the Reserve Bank is in no position to cut interest rates aggressively to offset any serious lapse in domestic demand. RMB Economics 1

2 Little room for manoeuvre Fiscal policy is equally bound. If we had started the year with a smaller budget deficit than we have now, the Treasury could have reduced taxes or accelerated spending. South Africa was in the fortunate position of being able to respond appropriately to the impact of the 2008/09 global (and domestic) recession as it came at the end of a long period of fiscal consolidation. Now, however, the deficit is large and the Treasury, rightfully, is committed to its reduction to prevent South Africa falling into a debt trap. To avoid further credit rating downgrades the Treasury must ensure its projections for a gradual reduction in the budget deficit are attained A notable portion of government borrowing continues to fund recurrent as opposed to capital spending. The public sector s wage bill has already grown sharply and the government is struggling to direct increased spending towards much needed capex. To avoid further credit rating downgrades (and so higher external borrowing costs and reduced capacity to borrow), the Treasury must ensure its projections for a gradual reduction in the budget deficit are attained. Bottom line All three components of domestic demand -- fixed investment, household spending and government consumption spending -- will therefore remain constrained, struggling to grow faster than this year. Neither will exports, the fourth component of demand, give the economy a boost, as the world economy will at best only start to lift itself slowly out of its present predicament later in In summary, expect another year of moderate economic growth of between 2.5% and 3%, inflation averaging close to 6%, interest rates staying low and the currency remaining volatile (and vulnerable). Figure 1: Growing trade deficits Rbn Trade balance (RHS) Exports Imports Rbn Source: SARB, RMB Economics Research Data as at December RMB Economics

3 Macro forecast December f 2013f Real GDP (% y/y, year average) GDP Household consumption expenditure Government consumption expenditure Fixed investment Exports Imports Balance of payments Current account (Rbn, year average) Current account (%/GDP, year average) Gold (US$/oz, year-end) 1,711 1,850 1,800 1,900 Oil (Brent, US$/bbl, year-end) Inflation CPI (% y/y, year average) CPI (% y/y, year-end) Core CPI (% y/y, year average) Core CPI (% y/y, year-end) PPI (% y/y, year average) PPI (% y/y, year-end) Exchange rates USD/ZAR (year average) USD/ZAR (year-end) EUR/ZAR (year average) EUR/ZAR (year-end) GBP/ZAR (year average) GBP/ZAR (year-end) NEER (year-end) REER (year-end) Interest rates Repo rate (%, year-end) Prime rate (%, year-end) month JIBAR (%, year-end) year government bond yield (%, year-end) Fiscal policy Budget balance (%/GDP, fiscal year) Note: 1 Fiscal year ending March for consolidated government Source: SARB, Stats SA, I-Net Bridge, National Treasury, RMB Global Markets Data as at December 2012 RMB Economics 3

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