Cape Town – A critical week for South Africa’s economy is unfolding, which started with the announced proposal of a minimum wage on Sunday and will conclude with a ratings review by Moody’s on Friday.
1. Mixed reaction to minimum wage proposal
Deputy President Cyril Ramaphosa announced that the proposed new minimum wage will be R3 500 per month or R20 per hour on Sunday.
"In the end, we don't want a national minimum wage... that would be so low that [it] wouldn't make an impact," he said on Sunday.
The announcement received mixed reaction, with one political party calling on Ramaphosa to try live on R3 500 for just one week to see how little that is.
Government will be informing ratings agencies on the “tremendous progress” made on labour stability issues in an effort to avoid a credit downgrade, said Ramaphosa, when he announced the proposal.
2. Energy plan could punt more nuclear energy
Tuesday sees one of the most important announcements in the energy sector in years, with the Department of Energy’s release of a draft Integrated Resource Plan (IRP) and Integrated Energy Plan (IEP) for public consultation.
The IRP is crucial for government as it moves to proceed with the nuclear procurement programme and will likely show the need for nuclear energy before 2030.
Research by the CSIR Energy Centre revealed this month that nuclear was not required and that renewable energy and gas could be used more effectively and at a cheaper price.
The energy plan proposed by government could therefore see much debate among energy experts, environmentalists and energy lobbyists.
3. All eyes on unemployment rate
Statistics SA will then announce 2016’s third quarter (July-September) unemployment figures on Tuesday. The unemployment rate in the second quarter (April-June) declined by 0.1 percentage point to 26.6%. It was a 1.6 percentage point rise from 2015’s 25% rate.
“The level of inactivity increased by 379 000,” said NKC Africa Economics. “This implies that those who lost jobs moved into inactivity rather than into unemployment, or that those who were previously looking for work stopped doing so.”
According to the June 2016 Quarterly Employment Statistics, all sectors apart from construction shed jobs in the second quarter of 2016.
A return to employment growth requires higher economic growth and renewed private-sector investment, Finance Minister Pravin Gordhan said in his mini budget in October 2016.
4. Consumer Price Inflation and Producer Price Inflation to show improvements
Statistics South Africa will announce October’s CPI (inflation) rate on Wednesday and its PPI rate (which impacts future CPI) on Thursday.
CPI inflation is forecast to have risen by 6% y/y in October versus a prior 6.1% y/y and is expected to average 6.0% y/y in the fourth quarter of 2016, according to Investec.
“The food and petrol price components should reflect the continued lagged drought effects, as well as the petrol price hike of 43c/litre in the month of October,” it said.
“We expect CPI inflation to average 6.2% y/y in 2016 but to return to the 3 – 6% target range, at an average of 5.2% y/y, in 2017.”
It said PPI inflation is forecast to have decelerated to 5.9% y/y in October from 6.6% y/y in September. “Advance indications provided by the manufacturing PMI survey suggest the easing in producer price pressures during the third quarter of 2016 persisted into the fourth quarter. A contributing factor has been rand appreciation.”
5. Sarb likely won’t hike repo rate
The SA Reserve Bank’s Monetary Policy Committee is set to announce the repo rate, which determines the rate at which banks lend money, on Thursday.
Rand Merchant Bank analyst Gordon Kerr believes a “downward surprise to inflation will continue to support our market and add credence to a no hike decision from the MPC”.
“Indeed with inflation expectations accelerating aboard, they continue to come under pressure locally,” he said.
NKC agreed that Sarb will “adopt a wait-and-see approach with regard to the market fallout from a possible sovereign credit rating downgrade, as well as towards developments in the US, with the US Fed set to announce its interest rate decision on December 14”.
Governor Lesetja Kganyago has said the Sarb was near the end of its rate-hiking cycle as the regulator juggles its mandate to control prices with the need to support stagnant growth.
6. Ratings seasons starts on Friday
The week’s economic climax will occur when Moody’s announces its ratings review of South Africa on Friday.
According to RMB analyst John Cairns Moody’s is the least important of the two big agencies given that they still have SA on two notches above investment grade status.
“It’s a close call on which way they go,” he said. “Moody’s turned notably more negative in their review in March, but did not follow through on it thanks to persuasive policy makers and promised reform.
“Whether Sunday’s last-minute labour-reform progress is enough to keep them from acting is unclear. In the event of a downgrade, the outlook will very likely be changed from negative to stable.”
Ratings agencies will in all likelihood hold off on a sovereign ratings downgrade, as such a move could justify the removal of Finance Minister Pravin Gordhan. This is the view of Gina Schoeman, South Africa economist of global bank Citi.
Moody’s investment grade of South Africa is at Baa2 for local and foreign currencies with a negative outlook. The rating is two notches above sub-investment (also referred to as junk) grade.
S&P has South Africa’s credit rating assigned as BBB+ (local currency) and BBB- (foreign currency) – one level above junk status with a negative outlook.
Fitch rates South Africa at BBB (local currency) and BBB- (foreign currency) – also one notch above sub-investment grade, but with a stable outlook.