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Johannesburg – Political and regulatory uncertainty continue to have a negative impact on the South African economy’s growth potential.
Commenting on the latest gross domestic product figures, Nomura emerging markets economist Peter Attard Montalto said that although growth targets have been revised, they remain low.
Data from Statistics South Africa showed that the economy exited a technical recession with 2.5% growth for the second quarter of the year.
“A slow recovery to low potential growth remains the theme,” explained Montalto. Nomura revised its growth forecast for South Africa for the year from 0.2% to 0.6%. Growth for 2018 was revised from 0.7% to 0.9%, and its 2019 projection remains at 1.2%.
“We therefore still see a long tail from the impact of political and regulatory uncertainty on the economy and a prolonged, if more narrowly targeted impact of Cabinet reshuffles particularly on private sector investment,” he said.
Assumptions for these projections are that the Zuma faction will win the ANC elective conference in December. The alternative scenario, a win for the anti-Zuma faction, would present a strong upside risk to growth for 2018 and a rebound in investment.
But there is still scepticism about whether a victory for the anti-Zuma faction would lead to stronger growth in the long term (between 2020 and 2030), Montalto explained. The growth forecast for this period is currently at 1.5%.
The latest figures may not be enough to shift ratings agencies’ views on growth, said Montalto.
He explained that the quarter’s GDP figures make fiscal data look weaker, but this may be due to a lag effect. If the lag eventually feeds through, slightly better revenue numbers may be reported later in the fiscal year.
Montalto added that the South African Reserve Bank may also be surprised by the latest GDP figures. The decision to cut rates at the last monetary policy committee (MPC) meeting was intended to provide “marginal additional support” for the “exceptionally weak” economy.
Rate cuts
There may be a case to cut rates further, based on the data. However, members of the MPC may also reflect on the resilience of the economy and decide that “sufficient support" has already been provided.
Montalto explained that most low growth is structural and beyond the SARB’s control. However, there may be space to cut interest rates in September. Nomura expects a 25 basis-point cut by the end of the year. The rate cut is more likely to happen in September than November, when there are risks related to ratings and politics, he said.
Also, the rand is below R13 to the dollar and the European Central Bank and the Federal Reserve Bank both have stretched out timelines which would make a rate cut more likely in September.
Nomura expects a 50 basis-point cut in 2018 if the anti-Zuma faction wins in December, but rate hikes are likely if the Zuma faction wins.
Finance Minister Malusi Gigaba welcomed the latest GDP figures, but called on all stakeholders in the economy to work towards ensuring an inclusive economy.
“We need to remain honest about the major challenges that still face the local economy. Poverty, unemployment, and inequality which are being underpinned by persistent low growth remain the challenge,” said Gigaba.
“Government and the private sector are to work closer together to inclusively develop the South African economy. I will be working closely with anyone who shares the urgency for higher economic growth,” he said.
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