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Depending on who you believe, the South African economy could stagnate in 2018 or it could be in for a mild recovery.
Most forecasters are predicting growth of between 1% and 2% this year, up from growth of about 1% in 2017 and 0.3% in 2016.
On the bearish side of the scale is the International Monetary Fund (IMF), which is forecasting growth of 0.9%. Goldman Sachs is among the most bullish, with its 2.3% forecast.
The big factor for the economy is what difference Cyril Ramaphosa is going to make as ANC president.
Ramphosa’s election gave the rand a boost, so much so that economists think inflation could come down more than expected next year. This, in turn, could see lower interest rates, if the rand continues to gain.
Earlier this month Ramaphosa drastically reshaped the Eskom board, which has inspired confidence.
Jeffrey Schultz, BNP Paribas economist, said the choice of Ramaphosa as ANC leader should provide a short-term “pop” to confidence and help lift local GDP growth slightly this year, given the very low bases in fixed investment and inventories, and a more stable, resilient consumer.
Schultz is forecasting growth of 1.6% for this year.
“Downside risks to growth remain, mainly from a still somewhat uncertain domestic political climate, as well as severe drought conditions in the Western Cape.”
Isaac Matshego, a Nedbank economist, said the bank was forecasting a slight pickup in growth this year, to 1.2% from 0.9% expected growth in 2017.
The Treasury is looking for growth of 1.1% and the South African Reserve Bank (Sarb) has a forecast of 1.4%.
The IMF said this week that growth prospects for South Africa remained subdued. It is expected to remain below 1% this year and next.
The IMF’s growth forecast of 0.9% for this year is the lowest for any major economy worldwide.
South Africans are likely to get poorer for another year if economic growth turns out to be around 1%, as this is below the population growth of about 1.6%.
Old Mutual Investment Group economist Tinyiko Ngwenya said it predicted South Africa would grow by 1.8% this year.
The investment and insurance company is forecasting a total cut of 0.5% in local interest rates this year, due to lower inflation and a stronger rand. Old Mutual is forecasting an average exchange rate of R12.75 to the US dollar this year.
In contrast, Goldman Sachs is projecting total rate cuts of up to 0.75% this year and an exchange rate of R11.50 to the US dollar in 12 months.
Schultz said lower inflation, as well as a less volatile domestic political environment, should allow the Sarb to start thinking about rate cuts in the first quarter of this year, with two 0.25% rate cuts possible – one each in March and May.
Given the forecast of weak growth, there would be little scope for job creation in 2018, Nedbank’s Matshego said.
Local unemployment is at a high of 27.7%.
Schultz said lower inflation and the decline in interest rates could spur consumer spending.
On the inflation front, he is forecasting average inflation of 4.9% in 2018 down from an expected average of 5.3% for 2017.
Ngwenya welcomed the move by the National Energy Regulator of SA to restrict Eskom’s energy price hike to 5.23%, instead of almost 20%.
Moody’s Investors Service has South Africa on the last rung of investment status and has put the country on notice for a possible downgrade. The budget speech, set down for February 21, is likely to be key to determining whether Moody’s reduces the country to “junk” status.
Schultz expects that S&P Global and Fitch Ratings, which already have South Africa on a junk status rating, will keep their credit ratings for South Africa unchanged this year.
S&P and Fitch ratings of South Africa would continue on a stable outlook.
Matshego said if Moody’s were to downgrade South Africa’s local and foreign currency ratings to junk it would mean that all three major agencies would give the country junk investment status.
Such a move could see tens of billions of rands in foreign capital leave the country and the rand would come under pressure but this would be moderated by low global interest rates relative to local rates.
Moody’s and Fitch were the most likely agencies to downgrade South Africa’s credit rating in 2018, Matshego said.
“To avoid further downgrades, there need to be bold announcements in the budget speech.”
Regarding the February budget speech, Schultz said Finance Minister Malusi Gigaba was likely to tweak marginal income rates for higher-income earners and raise estate and transfer duties.
Gigaba could remove some zero-VAT ratings on goods, such as fuel, which could generate R15 billion and R20 billion in extra revenue a year, Schultz said.
Gigaba would have to come out with greater expenditure cuts to balance the books, he said.
It would also be critically important that the Treasury ensure the public sector wage hike is capped at no more than 7% in the next three years.
On the topic of tax hikes, Matshego said Gigaba could announce some personal income tax increases and the corporate tax rate could be raised.
Ngwenya said a key question related to the budget speech would be the question about how Zuma’s free education plan would be included.
It would also be interesting to see what the budget said about state-owned enterprises, as both Eskom and SAA are both looking for bailouts.
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