South Africa has not had an easy few years, with the economy weighed down by persistent challenges including high levels of unemployment, slow growth, limited business and consumer confidence, and poor governance. However, there are some positive signs, and after some troubling years things are perhaps looking up – if slightly.“
The country has gone through a tough time. If we keep our shoulders to the wheel, we can begin to undo some of the damage that was done over the past 10 years,” says Cas Coovadia, managing director of the Banking Association South Africa.
Political change
The replacement of Jacob Zuma as president in February 2018, after almost a decade in power, was seen by many as an important development for the country. There are widespread hopes that his successor, Cyril Ramaphosa, will help to strengthen the overall economy as well as address entrenched issues in areas such as the governance of state-owned enterprises, which have only grown over the past decade.
South Africa’s unemployment rate stood at 27.1% in the fourth quarter of 2018, with high levels of poverty and inequality. Meanwhile, in the second quarter of 2018 South Africa’s economy slipped into recession for the first time since 2009, contracting by 0.4% (growth rebounded in the third quarter, rising to 2.2%, with full-year economic growth coming in at 0.8%).
Political uncertainty remains elevated in the run-up to South Africa’s general elections on May 8, which has led to investors being more cautious until fundamental policy issues have been clarified. The elections could help or hinder the sense of creeping optimism about a potential economic turnaround, depending on the outcome, with the African National Congress (ANC) widely expected to achieve a majority, and with the extreme left-wing political parties showing comparatively low levels of support.
Still, much needs to be done if South Africa is going to shake off its muted economic growth. “If the elections go well – and that’s a big if – and we have a reasonably stable political environment, we do have a platform to start doing what needs to be done to grow this economy,” says Mr Coovadia. “The opportunities are there, and without a doubt the interest is there from investors, providing we get a few things right.”
Challenging landscape
While the South African political landscape may have changed for the better in 2018, the impact on the economy has so far been limited.
In early December, Fitch kept South Africa’s sub-investment grade credit rating unchanged at BB+ with a 'stable' outlook, stating that the country’s rating was weighed down by “low growth potential, sizeable government debt and contingent liabilities, and the risk of rising social tensions due to extremely high inequality”. Standard & Poor’s also kept South Africa’s foreign currency and local currency credit ratings below investment grade in November, while Moody’s has South Africa at Baa3, one notch above sub-investment grade.
In his 2019 budget speech, delivered in February, finance minister Tito Mboweni said South Africa’s real gross domestic product (GDP) growth for 2019 was forecast at 1.5%, rising to 2.1% by 2021. Meanwhile, public expenditure was likely to come in at R1830bn ($130bn) for the year, with R1100bn of that set to go towards social services.
“Despite the hope that the nation had for the new political dawn, the growth trajectory of the South African economy remained subdued [in 2018],” says Lungisa Fuzile, chief executive of Standard Bank, South Africa’s largest lender. Last year was characterised by low business and consumer confidence, he adds, as well as political uncertainty, funding pressures on state-owned enterprises and the depreciation of the rand. “The risk of a sovereign downgrade remains contingent on the success of government policy reforms. All of these factors made for a challenging business environment,” he says.
Even so, Mr Fuzile believes that after several years of underwhelming, politically suppressed economic growth, a number of sectors of the South African economy offer elevated growth opportunities.
Economy boost
In September, Mr Ramaphosa announced a multi-billion-dollar stimulus package, with funds aimed at job creation and infrastructure development. Among the announced measures were R50bn of reprioritised expenditure and new project-level funding, as well as a R400bn medium-term infrastructure fund.
At the same time, foreign direct investment grew from an estimated $1.3bn in 2017 to more than $7bn in 2018, according to the UN Conference on Trade and Development. Mr Ramaphosa has vowed to revive the economy in part by attracting $100bn in foreign investment.
Still, any talk of an economic turnaround is premature. “We currently expect that GDP growth in 2019 will be 1.3%,” says Mike Brown, CEO of Nedbank, one of South Africa’s largest banks. “The good news is that’s higher than in 2018; the bad news is that 1.3% is still way lower than the potential growth rate in the South African environment.
“Our lens is that our country is still at the early stages of a political and institutional turnaround. We are making progress, but we still have a number of key hurdles in front of us,” he adds, pointing to challenges facing Eskom Holdings, which supplies the majority of South Africa’s energy, and debates around amendments to Section 25 of the constitution, which deals with the expropriation of land without compensation.
"In all of these we need to have much more definitive position points and resolutions before we are likely to see higher levels of confidence, investment and therefore growth,” says Mr Brown.
Meanwhile, South Africa’s budget deficit is expected to widen to 4.5% of GDP in fiscal year 2019-20, up from the 4.2% forecasted in October, partly as a result of the government’s announcement that it was stepping in to prevent the collapse of Eskom. The government has agreed to inject R69bn into the company over the next three years to help service its debt and free up cash for operations.
Rising debt
The cost of servicing South Africa’s existing debt remains an important issue for the country, given its constraining influence on economic growth. Government debt has increased from 26% of GDP in 2008 to 56% in the current fiscal year, according to the latest estimate, more than doubling in just a decade.
“Rising debt levels are something to be concerned about if we don’t actually begin to address the issues that have led to them,” says Mr Coovadia. “We haven’t had good policy implementation, which has impacted on investment and economic growth. This has resulted in less taxation. All of this led to a situation where we were unable to grow the economy effectively, and this led to the ratings downgrades.”
However, he believes that as long as the country gets its revenue collection right, and broadens the revenue base as the economy starts to pick up, it will be able to manage the debt. “If the debt continues to grow without actually dealing with the issues that led to us increasing our sovereign debt, then we will be in trouble,” he adds.
In November 2018, the central bank increased its benchmark lending rate for the first time in almost three years, by 25 basis points to 6.75%, highlighting the risk of higher inflation remaining elevated in the longer term. In January, the bank projected that inflation will average 4.8% in 2019, down from a previous forecast of 5.5%, with an average of 5.3% in 2020. South Africa’s rand is expected to remain volatile in 2019, further complicating monetary policy.
Looking ahead
In the short term, much could depend on the outcome of the May elections. Moody’s opted not to publish a rating update in late March, with many economists having predicted that it would downgrade the country’s outlook from 'stable' to 'negative'. In a credit opinion report released in early April, the agency said that while “economic growth will remain slow and fiscal strength will continue eroding, we expect South Africa’s credit profile to remain in line with those of Baa3-rated sovereigns”.
However, Moody’s added that social and political issues continue to hamper reforms, creating policy uncertainty, and it predicted that South Africa’s debt burden would reach 65% of GDP by fiscal year 2023.
One issue that has become all too apparent is the level of state capture in South Africa’s recent past, and the impact this has had on business confidence and economic growth. “What we’re all finding out is that state capture and the erosion of our institutions was even more damaging than we thought it was,” says Nedbank’s Mr Brown. However, he adds that it is positive that people are now finding out what happened. “It’s a good thing that we are putting a stop to it, and it is absolutely vital for ongoing trust, confidence and investment. I have no doubt that we are on a path of renewal, but it is going to be a slow path,” he says.
After years of economic stagnation, things may be looking up for South Africa.
