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Cape Town - Economic growth in sub-Saharan Africa is
expected to pick-up sharply in 2017 after slumping in 2015 and 2016 due to weak commodity
prices and drought conditions, said Overberg Asset Management (OAM) in its weekly overview of the SA economic landscape.
It noted that the economic cycle in sub-Saharan Africa is enjoying a solid recovery, following growth of just 0.7% in 2016 GDP, which is expected to expand in 2017 by 3.5% and accelerating to 4.0% in 2018.
The sub-Saharan region accounts for 30% of South Africa’s total exports and an even greater proportion of manufacturing exports, making it the country’s largest export destination.
South Africa economic review
• In its World Economic Outlook the IMF left South Africa’s GDP growth forecast at 0.8% for 2017 and 1.6% for 2018, unchanged from its January update despite the latest political upheaval. Although unchanged the growth forecast is considerably less than the Reserve Bank and National Treasury growth forecasts for 2017 of 1.2% and 1.3%.
The IMF cites favourable influences including higher commodity prices, stable electricity supply and the end of the drought but also highlights the effect of rising political uncertainty on confidence and investment. The IMF urges reforms of South Africa’s product and labour markets to foster faster jobs growth.
• Consumer price inflation (CPI) declined from 6.3% year-on-year in February to 6.1% in March well below the 6.4% consensus forecast. The decline is attributed to slowing food price inflation as the country continues to recover from last year’s drought. Food inflation eased from 10% to 8.7% with bread and cereals slowing from 12.8% to 8.5%.
Core CPI excluding food and energy fell sharply from 5.2% to 4.9%, significantly lower than the 5.3% consensus forecast. Although the decline is assisted by the statistical effect of the CPI basket reweighting in January there is unlikely to be any payback until 2018 which means core CPI could fall further to 4.6% by year-end.
The benign inflation outlook should prompt the Reserve Bank to initiate its interest rate cutting cycle in the second half of the year.
• Standard & Poor’s (S&P) cautioned that South Africa could suffer further credit rating downgrades if ongoing political uncertainty and factional infighting stall reforms and undermine economic recovery. Unlike Fitch rating agency which kept South Africa’s ratings “Stable” after downgrading them S&P maintained its “Negative Outlook” raising the likelihood of a further downgrade in its year-end review in December.
A further downgrade in the local currency rating to “sub-investment” grade would be especially likely if there is a material shift in National Treasury policy or if Zuma’s “radical economic transformation” camp gains the upper hand ahead of the ANC national electoral conference in December.
The week ahead
• Composite leading business cycle indicator: Due Tuesday 25th April. The Reserve Bank leading business cycle indicator, which gauges economic conditions 3-6 months ahead, increased in January for the sixth consecutive month to 97.1 rising to its highest level since the fourth quarter 2014. The February reading is expected to remain firm boosted by an increase in the South African produced export commodity price index and a synchronized economic recovery in major trading partners.
• Producer price index (PPI): Due on Wednesday 26th April. Producer price inflation (PPI), which fell from 5.9% year-on-year in January to 5.7% in February is expected to decelerate further to 5.4% in March. The decline is mainly due to falling food price inflation as South Africa recovers from last year’s drought. Grain price inflation fell in February by 23.5% on the year contributing to a 4.8% drop in overall agriculture level food prices.
• Freedom Day march: Due Thursday 27th April. The newly formed Freedom Movement, comprising opposition political parties, civil society, labour and faith-based organisations, is planning a protest march in Pretoria on Freedom Day to push for the removal of President Zuma.
• Trade balance: Due Friday 28th April. South Africa is expected to record another trade surplus of R7.0bn in March following-on from February’s R5.2bn surplus, according to consensus forecast. Imports have continued to contract due to weak domestic demand while exports have benefitted from the global economic recovery and rising international commodity prices.
The World Trade Organisation has reported that: “For the first time in several years all regions of the world economy should experience a synchronized upturn in 2017. This could reinforce growth and provide an additional boost to trade.”
• Private Sector Credit Extension: Due Friday 28th April. Growth in private sector credit extension (PSCE) is expected to show a slight lift from 5.3% year-on-year in February to 5.5% in March although this pales compared with average growth of 6.9% in 2016 and 8.9% in 2015. PSCE is being held back by depressed business and consumer confidence combined with tight lending standards.
Technical analysis
• The rand is trading in a range between R/$13.00 and 13.50. A break below R/$13.50 is required to pave the way for further depreciation to the R/$14.50 level.
• The US dollar index is testing a major 30-year resistance line, which if broken will pave the way for further strong gains in the currency.
• Following the announcement of the snap election the British pound has broken above key resistance at £/$1.25 which has now become a key support level and should promote further near-term currency gains. Recent strong gains have diminished prospects for a £/$1.18-1.22 target.
• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
• The US 10-year Treasury yield has broken back above the key support level of 2.0% endangering the multi-year bull trend in US bonds.
• The benchmark R186 2025 SA Gilt yield is trading in a tight trading range of 8.5-9.0%. A break above 9.0% is required for the yield to move decisively higher towards the 10.5% target level.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdqaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• Despite failing to hold above the $55 level the Brent crude price is well supported at $50 a barrel. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $5500 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1400 target level.
• A break above 54 200 on the JSE All Share index would project an upward move to 60 000 marking a new high for the JSE.
The bottom line
• The sub-Saharan region accounts for 30% of South Africa’s total exports and an even greater proportion of manufacturing exports, making it the country’s largest export destination.
International commodity prices are rising, current account deficits are narrowing, and the normalization of weather patterns is boosting agricultural output and hydroelectricity generation. Currencies are stabilizing and inflation is falling allowing central banks to ease monetary policy.
• After a year-long recession growth in Nigeria, Angola and Mozambique is expected to recover in 2017 aided by the stabilisation in oil and gas prices. Kenya should benefit from a loosening in fiscal policy ahead of the presidential election in August. Ethiopia and Zambia will be boosted by higher rainfalls and recovering agricultural sectors.
Ivory Coast, Uganda and Tanzania will benefit from easing inflation and increased infrastructure spending. While economic fortunes will vary between Sub-Saharan countries the common theme is broad-based recovery across the region amid a narrowing in current account deficits and a loosening in monetary policy.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
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