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Cape Town - South Africa is set for a sluggish growth recovery in the new year, according to Nomura emerging markets expert Peter Attard Montalto.
"A sluggish recovery for South Africa as a story is nothing new, but our forecast of 2.5% for 2014 compared with consensus (which has fallen considerably over the past nine months) of around 2.8% suggests a possible surprise. Equally, in 2015 we see growth of only 3.5%. This is after growth of 1.8% in 2013," says Montalto.
He believes the ebb and flow of underlying growth factors will be of greater significance than the headline numbers. "In particular we see consumption stalling through the first half as rate hikes begin but also (and we suspect more importantly) credit growth to households continuing to slow.
"It should pick up again slowly in the second half as real wage increases keep pace with higher inflation. As such, we see growth in consumption of only 3.5% for the full year after 2.8% in 2013, still much lower than the 4.9% seen in 2011," says Montalto.
Turning to the labour market, Montalto comments that 2013 turned out to be much quieter than expected at the beginning of the year, when the whole Marikana issue was still "raw".
He singles out the fact that "the market appears to have become immune to not only strike action but also violence", with wide-ranging but under-reported inter-union violence in 2013, particularly in the mining sector between the Association of Mineworkers and Construction Union (Amcu) and the National Union of Mineworkers.
"However, hard work by mining companies has led to some stability in 2013, independent of the government's attempts at compacts and 'peace declarations' for the sector," says Montalto.
"The derailing of the local government workers wage round and the fact public sector workers more generally didn’t split from their two-year wage agreement half-way through was also something of a surprise. However, we expect both to re-emerge in 2014 as multi-year agreements run out. A final factor has been the lack of economics around workers striking – it has cost them too dearly to be on unprotected strikes," says Montalto.
He singles out a coordinated strike by Amcu across the Rustenburg area in the platinum sector as possibly "one of the biggest events of the year", but predicts "the market will still broadly take it in its stride".
Downgrades on the cards
Turning to downgrades, Montalto comments that the second half of 2014 has "for some time been our expected date for downgrades for South Africa – by one notch".
"While agencies’ public commentary has been benign or even slightly positive, we believe the underlying checklist is still in place and the stickiness of South Africa's vulnerabilities will remain in place through 2014 to lead to a downgrade after the election. We think S&P and then Moody's are most likely to move," says Montalto.
"The checklist remains as follows: 1) rising debt levels and a debt outlook profile that continues to shift upwards, 2) a current account that remains poorly funded and sticky around 5-7% of GDP, 3) further labour market strife, and particularly violent unrest."
He sees government debt going up to 49% by 2016, "as a result of only a slow decline of the fiscal deficit from -4.4% of GDP in 2013 to -4.0% in 2014 and then only to -3.8% in 2015".
Montalto believes that 80% of post-election tax hikes wil go towards "plugging the gap of yet larger public sector wage increases, as well as boosting the social wage in response to poor vote take in the election. A decision not to pay down the deficit would be an alarm signal to the agencies."
Labour matters will also take their toll on rating agencies: "the grinding on of labour disputes from 2013, the potential for more violence as a range of multi-year disputes come to an end, and the union structural changes we detailed above that could increase tensions may all be enough to give a final tick on the checklist for the agencies".
But "a downgrade is widely expected by the market and in particular real money investors, and so while timing may be uncertain the event itself may have only short-lived market impact", says Montalto.
"A sluggish recovery for South Africa as a story is nothing new, but our forecast of 2.5% for 2014 compared with consensus (which has fallen considerably over the past nine months) of around 2.8% suggests a possible surprise. Equally, in 2015 we see growth of only 3.5%. This is after growth of 1.8% in 2013," says Montalto.
He believes the ebb and flow of underlying growth factors will be of greater significance than the headline numbers. "In particular we see consumption stalling through the first half as rate hikes begin but also (and we suspect more importantly) credit growth to households continuing to slow.
"It should pick up again slowly in the second half as real wage increases keep pace with higher inflation. As such, we see growth in consumption of only 3.5% for the full year after 2.8% in 2013, still much lower than the 4.9% seen in 2011," says Montalto.
Turning to the labour market, Montalto comments that 2013 turned out to be much quieter than expected at the beginning of the year, when the whole Marikana issue was still "raw".
He singles out the fact that "the market appears to have become immune to not only strike action but also violence", with wide-ranging but under-reported inter-union violence in 2013, particularly in the mining sector between the Association of Mineworkers and Construction Union (Amcu) and the National Union of Mineworkers.
"However, hard work by mining companies has led to some stability in 2013, independent of the government's attempts at compacts and 'peace declarations' for the sector," says Montalto.
"The derailing of the local government workers wage round and the fact public sector workers more generally didn’t split from their two-year wage agreement half-way through was also something of a surprise. However, we expect both to re-emerge in 2014 as multi-year agreements run out. A final factor has been the lack of economics around workers striking – it has cost them too dearly to be on unprotected strikes," says Montalto.
He singles out a coordinated strike by Amcu across the Rustenburg area in the platinum sector as possibly "one of the biggest events of the year", but predicts "the market will still broadly take it in its stride".
Downgrades on the cards
Turning to downgrades, Montalto comments that the second half of 2014 has "for some time been our expected date for downgrades for South Africa – by one notch".
"While agencies’ public commentary has been benign or even slightly positive, we believe the underlying checklist is still in place and the stickiness of South Africa's vulnerabilities will remain in place through 2014 to lead to a downgrade after the election. We think S&P and then Moody's are most likely to move," says Montalto.
"The checklist remains as follows: 1) rising debt levels and a debt outlook profile that continues to shift upwards, 2) a current account that remains poorly funded and sticky around 5-7% of GDP, 3) further labour market strife, and particularly violent unrest."
He sees government debt going up to 49% by 2016, "as a result of only a slow decline of the fiscal deficit from -4.4% of GDP in 2013 to -4.0% in 2014 and then only to -3.8% in 2015".
Montalto believes that 80% of post-election tax hikes wil go towards "plugging the gap of yet larger public sector wage increases, as well as boosting the social wage in response to poor vote take in the election. A decision not to pay down the deficit would be an alarm signal to the agencies."
Labour matters will also take their toll on rating agencies: "the grinding on of labour disputes from 2013, the potential for more violence as a range of multi-year disputes come to an end, and the union structural changes we detailed above that could increase tensions may all be enough to give a final tick on the checklist for the agencies".
But "a downgrade is widely expected by the market and in particular real money investors, and so while timing may be uncertain the event itself may have only short-lived market impact", says Montalto.
