SA economy is in for a rough ride

The rand exchange rate crashed on Friday and local bond yields grew more expensive as news of an economic contraction triggered a negative investor sentiment and views on the local economy.

The rand touched R13.28 to the dollar – its weakest level since December 18, when Cyril Ramaphosa was elected ANC president. On the other hand, the 10-year government bond weakened to 9.06% – the most expensive level since just before Ramaphosa was elected. This comes amid an increase this week in the petrol price to record levels that will hurt consumers and businesses.

Soon after Ramaphosa was installed as president of the country on February 15, the rand firmed to R11.50 to the dollar. In the days after his swearing in, the 10-year government bond yield declined to 7.985%.

The 2.2% drop in GDP in the first quarter, when compared with the fourth quarter of last year, was largely on the back of declines in the key manufacturing, mining and quarrying, agriculture, forestry and fishing industries. For the year ending in March, GDP expanded by 0.8%.

Isaac Matshego, a Nedbank economist, said this week’s first-quarter GDP figure was a “reality check”. Nedbank is forecasting economic growth of 1.5% for this year, up from 1.3% last year.

Last month, Ramaphosa said he was sticking to his target of 3% growth for this year.

However, he is much more bullish than the SA Reserve Bank, the National Treasury, the International Monetary Fund, the World Bank and many local private sector economists – they are all forecasting local growth this year of between 1% and 2%. Goldman Sachs earlier this year forecast a growth rate of 2.3%, and S&P Global Ratings is expecting growth of 2%.

Matshego said that, for the economy to start growing, it was vital for fixed investment to be revived, and this in turn would lift local productive capacity.

The move by Ramaphosa to try to attract $100 billion (R1.3 trillion) over five years in new investment was a good idea, but “wouldn’t be easy” to achieve.

Since being installed as president of the country, Ramaphosa has focused on political challenges, reshuffling the Cabinet, dealing with state-owned enterprises and stabilising the ANC ahead of next year’s national elections.

There has been a clear change in direction, but the country had a long way to go, Matshego said.

He added that a pick up in consumer and business confidence would take some time to come through in greater fixed investment spending, he said.

Raymond Parsons, an economist and professor at North-West University, said that, despite recent political changes and a better national mood, it was too soon to expect these developments to be translated into the real economy.

Matshego said that consumers were more confident, but they were feeling the effects of incomes being under pressure and job cuts.

Parsons said the latest GDP figures emphasised the uphill struggle the South African economy still faced in trying to break out of the “low growth trap” of the past to reach a higher growth and employment trajectory.

Citadel chief economist Maarten Ackerman said the disappointing GDP figures for the first quarter of this year show Ramaphoria has not yet affected the real economy.

“Weak quarter one growth will definitely put the 2018 growth targets outlined in February’s budget speech under strain, and could result in National Treasury’s fiscal targets being missed,” he warned.

Missing these targets would place South Africa “at increased risk again of further credit rating downgrades”.

He said muted annual GDP growth is particularly concerning given that economic growth is still falling behind the population growth rate, meaning South Africans as a whole are becoming poorer.

“The big question now will be whether we can avoid a contraction in the second quarter of 2018, which would push South Africa into a technical recession.”

Ackerman said the biggest boost to GDP was 1.8% growth in general government services on the back of increased public sector employment, which doesn’t bode well for South Africa’s fiscal targets or government’s ability to address the bloated government wage bill.

The greatest detractors from GDP were primary industries, which declined 13.8% since the previous quarter, followed by secondary industries with a contraction of 4.9%, while tertiary industries saw muted growth of just 0.3%.

“As expected, the tailwind from last year’s strong agricultural rebound faded in the first quarter of this year, contributing to the decline seen in the primary sector, while exports also struggled given the appreciation of the rand during the period. This movement also appears extreme given that the previous measurement was taken from a particularly high base,” Ackerman said.

“However, the contraction in the primary sector is still particularly worrying given that the growth of primary industries is key to addressing unemployment and poverty, especially among low-skilled workers.”

Ackerman emphasised that sluggish economic figures demonstrate that investors need to have more realistic expectations of the changes being implemented by the new leadership.

“Changes, such as the efforts being made to provide greater regulatory certainty, reduce unemployment and promote investment, are all encouraging, but these changes may take months if not years to bear fruit given the structural issues in the economy. To date, government’s leadership change has had a hugely positive impact on confidence and trust, but we need time to turn the economy around.”

Adrian Saville, the CEO of Cannon Asset Managers, said South Africa’s population growth rate, at 1.5%, comfortably exceeded our economic growth.

“On a per capita basis, South Africa is heading backwards. In fact, if we look at the past decade, we see income per capita has run flat from 2008 to date,” he said.

“South African households have endured a lost decade. South Africa is in a very low growth setting, and seems trapped here,” Saville said.

Turning to the expenditure side of the economy, Saville said the GDP picture looked equally worrying.

There are four expenditure components of GDP – private sector consumption, government spending, investment expenditure and net exports (the foreign sector).

“When looking at successful, competitive countries, we see economic growth is investment fed and export led. In South Africa, in the first quarter of this year, investment spend [gross fixed capital formation] slipped 3.2%. In fact, this sector has contracted in eight of the past 16 quarters, pointing to an anaemic economy that is investment starved,” Saville said.

“The export sector – an obvious display of competitiveness in international markets – saw exports down by 16.5% and imports falling by 6.5%. Of great concern is that the slippage in imports was largely of machinery and equipment – the very elements that feed future economic growth.

“On the expenditure side, growth came from consumption spending and the government sector, which is unsustainable by virtue of the fact that it represents activity, but doesn’t build productive sectors. Capacity for future economic growth, in the form of investment spending and importing capital goods, is not being developed and the levers to drive the economy are being neglected,” he said.

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