Treading the fine line

Johannesburg - The end of the worst drought in decades and the onset of an anticipated improved food supply are set to boost local economic growth in 2017.

A much bigger maize crop and a drop in food prices will also have a positive effect on food inflation and, in turn, consumer inflation. This could result in the first interest rate cut in the second half of 2017.

At the same time, the prospect of a downgrade in South Africa’s credit rating to sub-investment grade will continue to haunt the country in 2017, especially if the economy continues to stutter or moves into a recession.

Isaac Matshego, an economist at Nedbank, said 2017 would be another turbulent year for the economy, but less so than in 2016.

Gradual recovery

Matshego added that local economic growth would show a gradual recovery as global growth improved and agricultural production recovered, given that the country’s prevailing drought was forecast to end.

This thanks to a La Niña event, which results in wetter-than-normal conditions in southern Africa from December to February, and is thus set to bring above-normal rainfall.

Matshego said the mining and manufacturing sectors were also expected to stage mild recoveries in 2017 and higher commodity prices would boost the mining sector.

On the downside, he said the local economy was facing global geopolitical risks because of the impending inauguration of controversial US president-elect Donald Trump, as well as geo-economic risks, such as higher oil prices, because of supply cuts.

Matshego said Nedbank was forecasting that the local economy would grow by 1% in 2017 – up from a forecast 0.5% in 2016.

The International Monetary Fund is expecting South Africa’s economy to expand by 0.8% in 2017, while the World Bank has put growth at 1.1%.

The SA Reserve Bank is forecasting a 1.2% growth next year, while Treasury is expecting growth of 1.3%.

Turning to interest rates, Matshego said there could be an interest rate hike of 0.25% in the first half of 2017 before the central bank started to cut interest rates in the second half of the year.

Kamilla Kaplan, an economist at Investec, said consumer inflation was likely to move into the reserve bank’s target range of between 3% and 6% as the drought dissipated and food prices dropped.

With growth being weak and with inflation moving into the target range, the Reserve Bank was likely to hold the interest rate or start to lower it this year.

However, she added, there was a risk that the reserve bank could hike rates, depending on rand strength and the extent to which the Federal Reserve increased rates.

Sizwe Nxedlana, chief economist at FNB, said interest rates were likely to be flat in 2017, but pointed out the risk that local rates could increase by between 0.25% and 0.5%, depending on how the rand reacted to monetary policy tightening by the Federal Reserve.

Unemployment to stabilise

Unemployment, which reached a 13-year high of 27% in 2016, could stabilise and decline by a small margin in 2017, Matshego said.

Kaplan said that since the 2008 financial crisis, government had been the biggest job creator in the economy. This in contrast with the private sector, which had been cutting jobs.

Now that the state was freezing jobs as part of its cost-cutting measures, this would also have an effect on employment, she added.

She said South Africa’s credit rating would remain at risk of being downgraded to junk status in 2017, but added that the country would probably maintain its investment grade rating when the three major agencies – S&P Global, Fitch and Moody’s – reviewed their stance on the country’s ability to repay its debt in May/June, and again in November/December.

However, the risk remained that South Africa’s credit rating could fall to below investment grade, given that all three agencies had kept government debt at a negative outlook, Kaplan said.

Matshego said the two key factors threatening South Africa’s credit rating were the level of economic growth and the political situation.

“The political situation is vital, with the battle between Treasury and the president being part of a bigger battle. As the ANC elective conference [scheduled for December] approaches, political tension is likely to increase.”

Nxedlana highlighted the risk that S&P Global could downgrade South Africa to junk status in 2017 because of weak growth, while Moody’s and Fitch could keep the country at investment grade status.

“A rating downgrade is on the cards,” he said.

Budget speech

Finance Minister Pravin Gordhan’s 2017 budget speech, to be given next month, was likely to see increased fiscal discipline and higher taxes, Matshego said.

In his medium-term budget policy statement, delivered in October, Gordhan said Treasury was likely to raise R28bn in extra taxes in the 2017 Budget, followed by R15bn worth of extra tax measures in the 2018 budget.

Matshego said the rand was likely to remain volatile in 2017 as Trump’s policies and the Federal Reserve would be key drivers of movements in international currencies.

Kaplan said there was scope for moderate rand appreciation as the trade account had narrowed and South Africa had maintained its investment grade rating.