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Political volatility a key risk to SA's outlook - economists

Mar 06 2017 14:03
Lameez Omarjee

Johannesburg – Local politics and commodity prices are among key factors driving South Africa's economic cycle in 2017, say economists.

According to Standard Bank’s ‘The economy in 2017’ report, the biggest risk to economic growth will be political volatility, commodity prices and global growth.

The improvement of commodity prices in the second half of 2016 led to Standard Bank revising GDP growth projections from 1% to 1.4%, explained economists Kim Silberman and Walter de Wet.

However, the outlook for commodity prices remains uncertain and will have a bearing on the economic outlook.

“Because the outlook for commodity prices is uncertain, with the fundamental underpin not well understood, we assess risks to growth to be to the downside,” said the report.

The end in the drought cycle will also lead to the uptick in growth.

A recovery in GDP growth relies heavily in a recovery in net exports, which depends on global growth and commodity prices, explained the report.

Inflation outlook

Inflation is expected to average at 6% and should fall back in the target band in June 2017, said the report. However upside risks to inflation include oil, food, red meat and poultry prices which may rise by more than anticipated, said the report.

Standard Bank has revised the inflation outlook from 5.9% to 6%, this is down from 6.3% in 2016.

There is likely to be volatility in headline inflation due to petrol price base effects, said the report. At the end of the year inflation is expected to be at 5.5%.

READ: Inflation will drop, but consumers will sweat first

Subsequently interest rates are expected to remain unchanged but it may be a volatile year, with pressure for both hikes and cuts. “As markets on the one hand anticipate rate hikes in the US and face domestic political volatility, leading the call for a higher risk premium, and on the other hand inflation falling back below 6%”.

Rand outlook

The rand is expected to remain resilient despite political volatility, said the report. The rand should move close to R13/$ and should average at R13.25 by the fourth quarter in 2017.

“Our view is still that rand weakness will fade,” said the report. Standard Bank economists believe the rand is undervalued. Since the second half of 2015, the rand has been trading between R0.70 and R2.70 higher than it should.

“The currency should have traded closer to R12.50 during December 2016 than the R13.70 we saw,” said the report. 


Political volatility

Political economist at Standard Bank, Simon Freemantle, explained in the report that this year’s political environment will be dominated by the “battle” for the ANC’s leadership.

The ANC is set to have elections for a new party in December.

“The underlying threat of a major disruption in December will continue to shake sentiment towards the country’s political outlook,” said Freemantle.

“Early signs suggest that the primary battle will be between Deputy President Cyril Ramaphosa and African Union Commission Chairperson Nkosazana Dlamini-Zuma,” he said.

ANC chairperson Baleka Mbete, ANC treasurer Zweli Mkhize, and Free State Premier Ace Magashule, are also in the running.

“Given the intensity of the ANC’s current internal strife, such a winner-takes-all approach may threaten a further split in the party, one substantial enough to undermine the ANC’s grip on the national majority in the 2019 elections,” said Freemantle.

READ: Politics could derail SA’s first interest rate cut since 2012

The possibility of a credit downgrade to junk status will still dominate this year, said the report.

“Barring any drastic move from the president to shore up his authority in cabinet, which may trigger an immediate ratings review, ratings agencies will announce their updated reviews of the country’s sovereign credit status in June,” said Freemantle.

This coincides with the ANC’s five-yearly policy conference to be held in Gauteng. Here demands for “radical economic transformation” will be formalised.

“Politics, and the shape and intensity of potential change in this regard, will therefore again be a central element for ratings agencies in their determination of the country’s credit status this year,” said Freemantle. 

Read Fin24's top stories trending on Twitter:

economy  |  commodities  |  junk status  |  credit downgrade
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