Saturday, August 25, 2018

Expect South Africa to get ‘back on track’ after the 2019 elections: analysts

While Cyril Ramaphosa’s election as president and his
subsequent moves to root out public sector corruption buoyed
confidence in the country’s economic prospects, negative growth
and perceived slow progress has reversed this confidence on an
almost unprecedented level.
This is according to Old Mutual Investment Group presenters at
a media briefing this week, who explained that there are signs
that global growth will continue to be supportive for the South
African economy, and that economic reforms could accelerate
after the 2019 elections.
However, South Africa’s slow growth again highlights the
serious need for substantial, meaningful structural reform,
with the risk to fiscal sustainability and credit ratings
having become elevated again, they warned.
Johann Els, head of economic research at Old Mutual Investment
Group, said that while we have seen a shaky start to the year,
the global economy is still supportive – despite worries about
where it currently is in the cycle.
“The strong global recovery, which gained momentum from 2016,
has reached peak territory,” said Els. “But while it is
moderating and certainly less synchronised, it is still above
trend and we expect growth to continue into 2019, which creates
a supportive environment for SA growth.
“This global growth is underpinned by fiscal expansion in the
US, China and possibly Germany and elsewhere in Europe, as well
as being sustained by strong investment growth and improved
productivity growth.
“In fact, global growth could become more synchronised again if
the global trade war risk eases.
“The risks facing the global environment are likely to lead to
further growth moderation, but they’re unlikely to derail
growth altogether. Ultimately, we will see growth slowing
further into 2019, but a recession is unlikely,” he said.
Upside potential
Els added that leading indicators suggest that there is upside
potential when it comes to the SA economy.
He believes that local growth is likely to end this year very
close to the 1.3% achieved during 2017, which is markedly lower
than what was expected at the start of the year.
“Business confidence is still lagging, but consumer
fundamentals are not as bad as people may think, despite the
short-term pain caused by the VAT increase, petrol hike,
etcetera,” said Els.
He added that Ramaphosa’s $100 billion target in new
investments is also showing progress.
“We’ve seen recent investment commitments from Saudi Arabia,
United Arab Emirates, China and the UK, as well as private
sector investment from Mercedes Benz,” Els said.
“If this trajectory continues, we could be well on our way to
meeting this ambitious target and the success of the investment
drive could lift GDP to 3.5% to 4%, although it will need a
sustained confidence boost,”  he added.
Significant risks
But significant risks also remain, the analysts warned.
Old Mutual Investment Group MD, Khaya Gobodo, also presenting
at the briefing, said that the president’s investment drive
could take Gross Fixed-Capital Formation to 25% of GDP, but
only if the requisite investment conditions are met, which
includes policy clarity and certainty.
“This is even more relevant as the State doesn’t have the
balance sheet capacity. SA’s Budget deficit combined with
already high levels of debt make it difficult for the state to
substantially increase its contribution to fixed-capital
formation. SA’s savings,” he said.
“The private sector is therefore a key driver of gross
fixed-capital formation, but is also constrained by the low
savings rate in the country. This means heavy reliance on
foreign capital, and exposes our vulnerability to capital flow
reversal.”
Gobodo added that South Africa used to take a far greater share
of the permanent foreign capital allocated to the African
continent, but poor growth, policy and economic uncertainty has
severely dented confidence.
“The key to investment revival is business confidence and SA
businesses remain pessimistic about the country’s economy,” he
said. “Policy clarity and execution are a key ingredient to
driving improved business confidence.”
“Real structural reform and subsequent execution will create
the evidence required to substantially improve business
confidence.
“SA will have to improve the way it implements its policies in
order to facilitate better investment conditions. This includes
policy certainty relating to the mining charter and land
reform, continued strong focus on anti-corruption measures and
improved public sector governance specifically relating to
state-owned entities.
“We are already seeing what seems to be increased commitment
from the President and his Cabinet to the implementation of
structural reform and we would expect the pace to accelerate
after 2019 elections,”  he said.

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