As South Africa tries to engineer an economic revival, improving its growth rate hinges on revitalising key components of the economy. We have compiled a list of 12 key indicators that we monitor closely and have scored on a monthly basis since the beginning of 2018, to consistently and systematically assess if the country is making meaningful progress.
These 12 key indicators focus on a wide range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.
July / August 2019 analysis
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 Eskom, the average score of the twelve indicators has fallen back from 48% at the end of June to 46% in the first half of August, after rising to 51% in May.
The focus will now shift to the anticipated Eskom restructuring announcement in September / October, the MTBPS on 23 October, the Investment Summit in November and the credit rating review by Moody’s.
How we score:
Every month, each indicator is scored on a scale of 1 to 10, with 10 indicating an extremely high level of vibrancy and 1 suggesting extreme underperformance. The scores are then averaged across all 12 variables to derive the overall progress level (reflected as a percentage), which we will analyse and share with you here.
Leading economic indicator
Fixed investment activity
Institutional strength/SOE reform
Confidence (business and consumer)
Purchasing Manager's Index (PMI)
Interest rate spread
Are we on the right track?
South Africa’s economic performance remains fragile, partly hurt by the lack of clarity on the planned structuring of Eskom as well as the proposed NHI. The country’s economic performance remains disappointing. Since the National Election on 8 May 2019, President Ramaphosa and his newly appointed Cabinet have endeavored to improve the functioning of both central and local government, as well as the major State Owned Enterprises such as Eskom as well as other key public sector institutions. While some progress has been made, the improvements have been patchy and somewhat unconvincing. Consequently, business confidence remains subdued.
Recently the Minister of Finance announced that government would be providing significant additional financial support for Eskom. In particular, Eskom will receive an additional R59 billion over the next 2 financial years. This is in addition to the R23bn a year already allocated to Eskom in the February 2019 National Budget. The extra funding for Eskom, together with a looming large tax revenue shortfall, suggests that government’s fiscal balance will increase to a deficit of around -6.0% of GDP in 2019/2020, up from a projected -4.5% of GDP at the time of the budget. Consequently, government will have to borrow substantially more than what envisaged at the start of the year.
The policy environment has also been clouded by the details contained in government’s planned National Health Insurance initiative. In particular, the NHI is likely to cost significantly more than is currently envisaged by the Department of Health, resulting in increased government debt and higher taxes, while at the same time it represents a massive administrative challenge for government that might prove extremely difficult to implement effectively. There is also the added risk of increased emigration by health-care professionals should it become evident that the NHI will lead to a significantly loss of earnings. This is especially applicable to medical specialists. Unfortunately, the lack of clarity on key aspects of the proposed NHI suggests that the healthcare industry will continue to experience prolonged policy uncertainty, undermining new investment into the sector.
Unsurprisingly, given the further deterioration in government’s fiscal position, Fitch Ratings announced that although it has decided to leave South Africa’s international and domestic credit rating unchanged at BB+, which in one notch below investment grade, it has revised the outlook down from stable to negative. Fitch downgraded South Africa to below investment grade on 7 April 2017.
Overall, it is hard to argue against the concerns raised by Fitch. South Africa’s economic growth remains desperately weak at well below 1%, while the fiscal parameters have continued to deteriorate. It is also clear that Moody’s will share many of the same concerns when it reviews South Africa’s credit rating later in the year. At this stage the base expectation is that Moody’s will keep South Africa on an investment grade credit rating later this year, but revise the outlook down from stable to negative. The South African fiscal authorities have a lot of work to do over the coming months if the country is to avoid such an outcome.
The Reserve Bank has highlighted on numerous occasions that the current challenges facing the South African economy are primarily structural in nature and cannot be resolved by monetary policy alone. Implementation of prudent macroeconomic policies together with structural reforms that raise potential growth and lower the cost structure of the economy remains urgent.