Recovery in GDP on the cards, but political risks remain - economist

Cape Town – Although there are significant risk factors that could impact on the South African economy, the country is not as risky as its emerging market peers, such as Turkey, opined Peter Attard Montalto of the Japanese investment bank Nomura. 

In a company note issued on Thursday, Montalto, an emerging market economist, said he expected South Africa to outperform Turkey – “at least for the first half of 2017 or longer” if the Central Bank of Turkey fails to regain some credibility. 

“We see (GDP) growth broadly constant through 2017 in year-on-year terms after a step-up in first quarter economic data in March,” Montalto said, but cautioned that negative per capita income growth and total factor productivity growth could be “lowlights” of the year. 

Inflation is expected to fall from its December peak in January, but should start rising again after July to the top end of the target of the South African Reserve Bank (Sarb). 

Montalto said the key investor question for the coming year will be: What are the drivers of growth in South Africa. “We think the answer is likely to be a very loud ‘not much at all’,” he added, although it is to the country’s credit that the economy showed resilience by avoiding a recession in 2016, despite all the political negativity. 

Nomura is of the view that politics in South Africa will remain “noisy”, although the markets have become “bored of attempting to follow the intricacies of the ANC’s internal machinations,” Montalto said. 

According to him, the markets will still “overplay” the risk of an early exit of President Jacob Zuma, but this is unlikely before the December ANC leadership elective conference. 

“In our opinion, the internal compromises that have been reached after the November NEC meeting (during which Tourism Minister Derek Hanekom asked Zuma to step down) will prevent an exit of (Finance Minister) Pravin Gordhan,” Montalto said, but added that there’s a “meaningful likelihood” of a wider cabinet reshuffle that could shock the market. 

Things to watch out for in 2017 

Montalto said that a review of South Africa’s credit rating still present a fiscal risk – although the timing of it remains uncertain. 

The state of affairs at the power utility Eskom should also be watched. “Indeed the ebb and flow of events around Eskom, particularly with regard to contingent liabilities and its nuclear build programme will dominate again,” Montalto said. 

On the political front, possible ANC “splits in parliament” remain a possibility, while the ANC’s elective conference during which policy will also be discussed, will also be significant. 

In conclusion, Montalto is of the view that the Sarb will be “hawkish” throughout the year and will be ready to act if the rand weakens or inflation creeps higher than expected.

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