As SA tries to engineer an economic revival, improving the country’s growth rate is becoming increasingly critical, and hinges on revitalising key components of the economy. We have compiled a list of 12 key indicators we are paying close attention to, scoring them on a monthly basis to assess if SA is making meaningful progress towards an economic turnaround.
The ranking began in January following the election of Cyril Ramaphosa as ANC and South African president, and the ensuing Ramaphoria. The 12 indicators chosen focus on a wide range of variables including political stability, policy clarity, business confidence, employment, capital expenditure, housing activity and consumer income.
Taking into account the impact of the various key economic developments over the past month, the average of all twelve indicators scored an improved 4.8 out of 10, or 48% in October 2018. This compares with a score of 45% in September and a recent low of 40% in August.
The score of 48% is consistent with the expectation of still very modest economic growth, and remains disappointing relative to early 2018 expectations, but is perhaps signaling that SA has reached a turning point.
Hopefully the current economic stimulus and recovery plan will start to have a visible impact on economic sentiment and growth within the coming months, and especially during 2019.
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
Purchasing Manager's Index (PMI)
Leading economic indicator
Institutional strength / SOE reform
interest rate spread
Fixed investment activity
(business and consumer)
Are we on the right track?
Lifting South Africa’s growth rate to above 3% on a sustained basis will require significantly more effort than is currently evident, including the co-ordination of policy efforts across key government departments. There is a risk that the consumer confidence index showed excessive optimism during Q1 2018.
In our view these challenges can be broken down into five main categories:
- Uplifting business confidence to stimulate private sector fixed investment
- Restoring fiscal discipline and avoiding further credit rating downgrades
- Reforming SOEs
- Ensuring clear and consistent transformation policies
- Reducing the extent of corruption in both the private and public sectors
Despite initial optimism that the political changes that occurred in December 2017 would quickly lead to signs of an economic revival, South Africa’s economic performance has been disappointing, with the economy slipping into a technical recession in the first half of 2018.
While we are still forecasting positive GDP growth for 2018 as a whole, the rate of expansion is now expected to be well less than 1%, which is far below the level of economic growth that would result in widespread job creation. The Reserve Bank and National Treasury recently revised their SA GDP forecast for 2018 down to a mere 0.7%.
Recently the Minister of Finance, Tito Mboweni presented his first Medium Term Budget Policy Statement (MTBPS), providing a sobering update of South Africa’s fiscal parameters. The Minister presented clear evidence of a further fiscal slippage due to a combination of three key factors namely a decline in tax buoyancy (government is collecting less tax revenue for every unit of GDP growth compared with earlier years), a very weak economic environment, and the need for government to provide additional funding to the State Owned Enterprises, especially SAA and the Post Office.
The net result was a somewhat unexpected deterioration in government’s budget deficit over the next three years, a larger than expected increase in government debt relatively to GDP, and a clear indication that government is going to have to substantial improve its fiscal management as well as its ability to implement key policy initiatives, especially infrastructural development.
The fiscal parameters presented by the Minister will most likely raise concern by the credit rating agencies, especially Moody’s. Fortunately, the extent of fiscal slippage is probably not severe enough to result in Moody’s downgrading South Africa’s credit rating to below investment grade, but the risks have increased.
More positive, over the past six weeks President Ramaphosa has embarked on a number of initiatives to lift confidence and economic growth. These include the President’s growth and recovery stimulus announced in late September 2018, the Job Summit in early October 2018 and most recently the Investment Conference held on 26 October 2018. The aim of these policy initiatives is to promote South Africa as a preferred investment destination. Encouragingly, the recent Investment Conference emphasised the importance of co-operation between government and the private sector, with many cabinet ministers highlighting the importance of policy certainty as a key factor needed to encourage private sector investment.
The key outcome of the Investment Conference was that private business in South Africa has committed to undertaking R290bn of investment over the next few years. Although this is considerably less than the five year target of $100bn set by the President in April 2018, it is a very encouraging start.
Understandably, some of this investment had been previously announced, while a portion represents ongoing investment projects. Nevertheless, it was encouraging to see numerous South African companies represented at the Conference and being willing to increase their investment spend. Some of the companies announcing fixed investment initiatives included Sappi, Mondi, Anglo American, Naspers, Bidvest, McDonalds, Aspen, Vodacom, Procter & Gamble and Nestle. In addition most of the large motor vehicle companies announced expansion plans, while SANRAL indicated that they were embarking on a new and fairly large road construction project.
Overall, the various stimulus measures are to be applauded since there is an urgent need to lift the country’s rate of economic growth as well as boost business confidence. (This was highlighted by the President at the Investment Conference).
Furthermore, many of the growth initiatives identified are critical to the growth of specific industries or sectors. The focus is now on project implementation as well as ensuring that key areas of policy uncertainty are resolved as soon as policy.
Previously, a lack of implementation has undermined the credibility of government’s various stimulus packages, thereby weakening business confidence.
In the meantime, key components of the SA economy remain extremely weak. In particular, consumers have been hurt by a sharply higher petrol price, slowing income growth and rising unemployment.
At the same time the Rand remains volatile and weak, and the SA Reserve Bank is warning about possible interest rate increases if the rate of inflation moves closer to the top-end of the inflation target. Hopefully, Moody’s continues to rate South Africa as “Investment Grade”.
To track our progress since the beginning of the year, visit our Knowledge Centre on https://knowledgecentre.stanlib.com/measuring-south-africas-economic-turnaround-july-2018/