Policy debates and poor implementation in South Africa are further delaying economic recovery

SOUTH AFRICA - Forecast 24 Oct 2019 by Iraj Abedian

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Summary and Assumptions
• South Africa’s growth: Recovery of GDP growth in the second quarter of 2019 helped to contain the growing pessimism regarding the South African (SA) economy. Not only did GDP growth surprise on the upside, but it also meant an aversion of a second technical recession in two consecutive years.
• The National Treasury policy paper: One of the biggest events in South Africa’s policy space over the last few months came in the form of the now famous National Treasury economic strategy paper released by Finance Minister Tito Mboweni. The paper basically proposes a number of strategies that are meant to revive the South African economy, many of which are sound and practical. Nevertheless, the policy paper is still being discussed and is yet to be implemented, although President Ramaphosa has voiced support for it and its contents.
• The mining sector: Mining was the largest contributor towards overall GDP growth in the second quarter. This rather impressive growth, however, followed three consecutive quarters of contractions in the sector. The sector will remain constrained by slowing global economic growth as well as the ongoing domestic policy uncertainty in the sector.
• Domestic demand: High frequency data alludes to muted domestic demand, which remained lackluster during the third quarter.
• Employment: The country’s employment numbers worsened during the second quarter as the unemployment rate increased to 29%. Over the past number of years, it has been mostly the tertiary sector that has been contributing positively to growth in jobs (e.g. finance and trade), while sectors such as mining and manufacturing have been losing a significant number of jobs.
• The exchange rate: The South African exchange rate has been highly volatile over the past months. The opposing forces of investors searching for yield, especially as central banks in developed economies are cutting interest rates, as well as the growing risk aversion concerning assets that are perceived to be riskier, such as those of SA, as the global economy becomes more tumultuous, have been at the root of this volatility and will in all likelihood remain so.
• Fiscus: Government finances continue to be bled by state-owned entities, particularly Eskom. The upcoming Medium Term Budget Policy Statement, to be presented on either October 29 or 30, will likely clarify the future of these entities.