Ramaphosa may lift growth, but risks lurk

President Cyril Ramaphosa delivers his inaugural State of the Nation Address. (Photo: Ruvan Boshoff, AFP)
President Cyril Ramaphosa delivers his inaugural State of the Nation Address. (Photo: Ruvan Boshoff, AFP)

There is a high probability of improved local economic growth in the next five years under President Cyril Ramaphosa, compared with preceding years, PwC analysts said this week.

However, PwC forecast a 25% probability of the next five years delivering economic growth of less than 1.5%.

“This indicates a one-in-four chance that the election of Ramaphosa will have no significant effect on the local economy,” PwC analysts said in a report that forecast the probabilities of five possible scenarios.

In PwC’s main scenario, the auditing company allocates a 50% probability that reforms would lift gross GDP growth to 2% in 2020 and 3% by 2022.

It did not expect further downgrades of credit ratings by the major agencies for the next five years.

In that case, PwC expects the rand to weaken from its prevailing level of 11.85 to the dollar to 15.60 in 2022.

On the upside PwC allocates a 20% probability of GDP growth rising to 4% by 2022 and the country’s credit rating to return to investment grade.

In this scenario PwC forecasts there would be an improvement in the quality of governance that would result in a strong foundation for long-term economic success.

In the best-case scenario, for which PwC allocates a 5% probability, GDP growth would be higher than 4.5% by 2022 and South Africa’s credit rating would quickly return to investment grade.

In this best-case scenario, state-owned enterprises would be privatised and there would be greater involvement of private companies, PwC said.

South Africa would have reduced rigidity in the labour market by ensuring that wage determination was much more responsive to company-specific circumstances, as opposed to the dominance of collective bargaining.

PwC’s report said this would be an important linchpin in the revival of the manufacturing sector. Stronger export competitiveness would support the rand, which would average 13.30 to the dollar in 2022.

On the downside, for which PwC allocates a 20% probability, populist choice would limit GDP growth to 1.5% and the country’s credit rating would be downgraded by another notch.

In this case the strengthening of the rand would fizzle out.

PwC said rating agencies would downgrade the sovereign’s local and foreign credit ratings again in 2018 to 2019 before they stabilised.

Power and water utilities would remain in the financial and management doldrums.

Business and consumer confidence would fail to recover to positive territory, it said.

In the worst-case scenario limited reforms would keep local growth below 1% and South Africa’s credit rating would be downgraded by two notches.

In this case Ramaphosa’s changes at Eskom would have “little lasting” effect because of the power utility’s legacy of poor management and planning.

The state capture inquiry would drag on for several years with little tangible action against transgressors and job creation would continue to disappoint.

The report said that in the absence of much improvement on the policy and governance front, business and consumer confidence would remain pessimistic.

Investors in particular would be concerned about the expropriation of land without compensation.

PwC expected the rand to depreciate in this scenario to 18.20 to the dollar.

This would contribute to higher consumer price inflation and upward adjustments in interest rates, with a decline in GDP per capita.

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