The scoring process
Given the critical importance of an economic turnaround in South Africa, we have compiled a list of 12 key indicators that we closely monitor and have scored on a monthly basis since the beginning of 2018 in order to consistently and systematically assess if South Africa is making meaningful progress in revitalising the broader economy. These 12 indicators, which are detailed in the charts attached, focus on a wide range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.
Every month, each of the selected indicators are scored 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 averaged across all 12 variables in order to derive an overall level of progress, which we analyse and distribute each month through email. Please note the progress/score will be reflected as a percentage ranging from 0% to 100%.
As a point of reference, a score of 3 or less out of 10 (i.e. 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 (i.e. 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 (i.e. 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 (i.e. above 70%) would be consistent with strong growth, broadening infrastructural development, a vibrant labour market, a robust housing market, and positive wealth effects.
Leading economic indicator
Fixed investment activity
Institutional strength/SOE reform
Confidence (business and consumer)
Purchasing Manager's Index (PMI)
Interest rate spread
South Africa’s economic performance remains fragile. GDP growth estimates for 2019 and 2020 have been systematically revised lower, there is continued uncertainty about the planned restructuring of SAA and Eskom, Moody’s will most likely downgrade SA’s international credit rating to below investment grade in early 2020, there is growing evidence of increased distress borrowing at a household level, and business and consumer confidence remains subdued.
At the start of the final month of 2019 it is clear that South Africa’s economic performance remains disappointing and the economy appears unable to gain any momentum given the weak business confidence, slowing household income, high and rising government debt, the ongoing risk of intermittent electricity supply, and a weak labour market. Consequently, the South African economy is expected average growth of only 0.5% in 2019, rising modestly to 0.8% in 2020. This is well below the rate of growth in the population, implying a further decline in the country’s average income per person.
The medium-term budget policy statement (MTBPS), presented in October 2019, provided a sobering but realistic assessment of government finances, especially the rapid and unmitigated deterioration in key fiscal parameters during recent years. More importantly, it revealed South Africa is heading towards a debt trap and a credit rating downgrade in the first half of 2020 unless significant changes occur.
The systematic deterioration in South Africa’s fiscal position largely reflects the combined effect of three major constraints, namely a fall-off in tax revenue, the provision of significant additional finance to support many of the SOEs including Eskom, and inefficient spending by many government departments. As a result of these three constraints government debt has risen from a low of 26% of GDP in 2009 (at the time Moody’s had assigned South Africa an ‘A’ credit rating), to an estimated 60.8% of GDP in 2019/2020 and is expected to rise to over 70% of GDP within the next three years. This means that in value terms, over the past three fiscal years, government debt will have risen by a massive R934 billion, equivalent to R25.9 billion a month, or an average of around R1.1 billion each working day. Given the sharp fiscal deterioration it is unsurprising that Moody's Investors Service as well as Standards and Poor’s decided to revise South Africa’s credit rating outlook from stable to negative.
This increase in debt is especially damning considering the deterioration in South Africa’s socio-economic conditions, especially sustained low economic growth, record high unemployment, a record low savings rate, systematic downward revisions to the credit rating, regular electricity outages, a fragile water supply, the deterioration in public sector health and poor education outcomes.
Overall, it is hard to argue against the concerns raised by both S&P and Moody’s. Furthermore, the Reserve Bank has highlighted on numerous occasions that the current challenges facing the South African economy are primarily structural. Implementation of prudent macroeconomic policies together with structural reforms that raise potential growth and lower the cost structure of the economy are, therefore, urgently required.
Taking into account recent economic and policy developments, including the lack of a decisive policy response to SA’s weak economic environment and uncertainty surrounding the restructuring of SAA and Eskom, the average score of the twelve indicators remains below 50% at 46%. Back in May 2019 the score had risen to 51%. This does not mean that government has been unresponsive to the weakening economic environment or the deterioration in its fiscal position. For example, the policy document released by National Treasury in early October 2019 is very encouraging. However, it does suggest that not enough is being done to urgently remedy the current economic deterioration, including efforts to resolve the debacle at SAA, but also efforts to substantially boost business and consumer confidence. Instead, signs of household financial distress continue to expand.
The focus will now shift to the urgent need to restructure SAA, the outcome of the National Budget in February 2020, the progress being made by the new CEO of Eskom the next credit rating review by Moody’s – all within the next four months.