January 31, 2018
The South African economy has struggled to gain any momentum since the global financial crisis in 2008/09, despite a relatively positive global economic backdrop. Instead, South Africa ‘s economy has decoupled from the performance of the world economy, averaging growth of a mere 1.5% over the past nine years and a mere 0.8% in the past three years. This underperformance is reflected in rising levels of unemployment, increasing tax revenue shortfalls, depressed levels of consumer and business confidence, a protracted fixed investment recession in the private sector and credit rating downgrades.
Given the South African economy should be growing at around 2% to 2.5% instead of 1% for 2017 as whole. Closing the gap between South Africa’s current growth rate of 1% and the 2.5% hinges on revitalising key components of the South African economy, including business and consumer confidence.
In the months leading up to the ANC National Conference in December 2017, the political, economic and investment horizons shortened due to the immediacy of the ANC leadership struggle. However, in the aftermath of the conference the leadership of the government will have to increasingly turn their attention to the economic challenges facing the country.
These challenges can be broken down into five main categories, namely uplifting business confidence in order to stimulate private sector fixed investment, restoring fiscal discipline, reforming State Owned Enterprises (SOEs), ensuring clear and consistent transformation policies and reducing the extent of corruption in both the private and public sectors. The government’s ability to successfully address these challenges will shape South Africa’s economic performance over the next few years.
Fortunately, and unsurprisingly, the reaction in South Africa’s financial markets to the election of Cyril Ramaphosa as President of the ANC in December 2017 has been extremely positive, especially the rand exchange rate and the domestic bond market. This is partly because Ramaphosa has highlighted the need for policy clarity and the importance of lifting business and consumer confidence.
In short-term it is hoped that government will focus on improving the fiscal position in many of the large state owned enterprises, including Eskom, as well as strengthening key institutions such as National Treasury and the South African Revenue Services. Under these circumstances it is possible for the country to avoid further rating downgrades and start to lay the foundation for an uplift in economic performance. Furthermore, raising the growth rate beyond 2.5% is also possible if the country is able to build sufficient capacity in infrastructure, skills, and technology, inspiring an expansion of private sector capacity.
Without a sustained pick-up in economic growth, the fiscal authorities are going to find it increasingly difficult to meet their budget projections and the country will continue to face the risk of additional credit rating downgrades, rising unemployment and further social tension. Moody’s remains the only major credit rating agency to assign South Africa an investment grade rating for both its long-term foreign debt as well as long-term domestic debt, but they have South Africa on a negative outlook and has placed the country on a rating review that will be assessed in March 2018.
Given the increased potential and importance of an economic turnaround in South Africa, we have compiled a list of 12 key indicators that will be closely monitored and scored on a monthly basis in order to help us consistently and systematically assess if South Africa is making meaningful progress in revitalising the broader economy. These 12 indicators, focus on a wide range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.
How does this score work?
Each of the indicators is scored (subjectively) on a scale of 1 to 10, with a score of 10 indicating an extremely high level of vibrancy and a score of 1 suggesting extreme underperformance. The scores are then averaged across all 12 variables in order to derive an overall level of progress. The sore is reflected as a percentage ranging from 0% to 100%. We will analyse and distribute an updated score every month in order to track the progress South African is making.
As a point of reference, a score of 3 or less out of 10 (ie 30% or less) would be consistent with economic stagnation, a high risk of an outright recession, declining levels of confidence, declining levels of fixed investment, rising unemployment and further credit rating downgrades.
An average score of between 3 and 5 (ie between 30% and 50%) would signal positive but sluggish growth, a lack of meaningful capacity building, constrained budgets, and a stagnant labour market.
A score of between 5 and 7 (ie between 50% and 70%) would argue for GDP growth of around 2% to 3%, some expansion capex, modest employment growth, and an improving fiscal position.
Lastly, a score above 7 (ie above 70%) would be consistent with strong growth, broadening infrastructural development, a vibrant labour market, a robust housing market, and positive wealth effects.
Currently (January 2018), the average of all twelve indicators scored an unimpressive 3.3 out of 10, or 33%.
While there has been an improvement in political stability, a fundamental change in the Eskom board, and an uplift to household income growth given the expected moderation in consumer inflation due to recent currency strength, significant challenges remain. These include, the need to start to reform other key SOEs, on-going policy uncertainty (for example the mining charter, land redistribution, the use of nuclear energy, the funding of tertiary education, the roll-out of National Health Insurance, debt forgiveness), the risk of a credit rating downgrade in March 2018, and a lack of private sector capital expenditure, including maintenance capex.
More positively, although a score of 33% is low and consistent with the overall economic performance of the country, there is a reasonable expectation that the score will improve meaningfully in the months ahead.
Written by Kevin Lings – STANLIB Chief Economist