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South Africa: is the political climate responsible for the growth decline?

Abstract

While the global macroeconomic environment has become more favorable for emerging economies, scandals around President Zuma have contributed to the weakening of the South African currency heavily penalizing growth in the first quarter. In the current context, as growth factors supporting growth are very limited, we significantly lowered our forecast for this year but also for 2017. 

Although South Africa avoided having its sovereign rating downgraded by Moody’s and Fitch in early June, the situation is far from gratifying. In addition, the figures for the first half of the year have led us to revise our growth forecasts downward, even though the global macroeconomic climate is more positive for emerging markets than it was a few months ago. There is no doubt that the large number of political scandals that have emerged since last winter have negatively impacted the South African economy. Furthermore, even though we do not expect a recession in 2016, we must keep in mind that downside risks have increased. Recent political events could lead to a split in the ANC, destabilising the political system with dire consequences for the economy over the short term.

1. GDP growth in Q1 2016 was negative and cyclical indicators in the second quarter were hardly reassuring 

At the end of 2015, our growth forecasts for South Africa were based on stable private consumption and a renewal of both private investment and public consumption. Under these assumptions, we expected GDP to grow by +1.8% in 2016 versus +1.3% in 2015, (see table 1).

There were several arguments behind our forecasts: i) stabilisation of the global economic environment and decreased uncertainty (rebound in commodities prices, stabilisation of China, slower tightening of US monetary policy), ii) an improvement in the political and social context and iii) the end of electricity shortages.

2016.07.01---tab1

Today, the release of some data has led us to revise our forecasts downward. First, most cyclical indicators are deteriorating. For example, industrial production has been reduced significantly under the impact of a marked decline in the mining industry (-10% on average year-on-year since the beginning of the year) and a decrease in agricultural production and electricity generation. Although the composite PMI, i.e. manufacturing and services, recovered slightly in April, it remains in negative territory (47.9). Similarly, retail sales rose by only +1.5% year-onyear in April versus +2.9% in March (see Chart 1).

Then GDP in Q1 2016 (-0.2% year-on-year) proved to be much lower than in Q4 2015 (0.5%). The slight decline in investment observed at the end of 2015 (-0.1% year-on-year) increased in the first quarter of 2016 (-1.3%). In addition, private consumption slowed sharply (+0.8% versus +1.9% the previous quarter). The significant increase in public spending (+2.8% year-on-year) and the marked decline in imports was not enough to keep GDP growth positive in Q1 (see Chart 2). 

Several factors explain the slowdown in private consumption. Household disposable income has clearly increased in nominal terms (+7.3% year-on-year in Q1 2016 versus +6.6% in Q4 2015) but an increase in inflation (+6.5% in Q1 2016 versus +4.9% in Q4 2015), driven by the rand’s depreciation, has limited gains in consumer purchasing power in real terms. As for the labour market, conditions have also been negative. Although year-on-year job creation has gone up, unemployment has been consistently on the rise. It is currently at 26.7%, due to the loss of a number of jobs in the manufacturing, agricultural, mining and transport sectors, at the very same time the working-age population is constantly expanding.

2. The factors boosting growth for the rest of the year remain limited

Notwithstanding the rebound in commodities prices, which should bring some relief to the South African economy, the internal economic and political context is expected to continue to weigh down on growth. In fact, unless inflation drops significantly, uncertainty over US monetary policy and the slowdown in China mean that South Africa’s central bank has relatively little room to manoeuvre (see Chart 3). It could keep its key interest rates unchanged until at least the end of Q3 2016. In such a context, financing terms (key interest rate at 7% and 10-year bond yield at 9%) continue to work to the detriment of credit, investment and private consumption, which ultimately are not expected to grow faster than 0%-1% in 2016.

The budget policy is also constrained by a deficit that exceeded 4% of GDP in 2015 and public debt that, as a percentage of GDP, has risen by 10 percentage points in four years to exceed 50% of GDP (see Chart 4). In order to prevent the rating agencies from downgrading its sovereign rating, South African authorities have voted for a 2016 budget that includes a plan to reduce the deficit by approximately 1.5% of GDP within
three years. In the current context, even if this goal seems hard to achieve, the authorities will nevertheless make efforts in this direction. This budget consolidation will involve higher income tax (hitting private consumption) and a decrease in public spending. Growth in public spending was at 2.8% year-on-year in the first quarter. Even though the authorities are adopting a restrictive budget policy, public spending is expected to grow by approximately 0.5% to 1% per year on average.

In total, although our initial scenario forecasts GDP growth of 1.8% in 2016 and 2.2% in 2017, the developments early this year have led us to revise our forecasts significantly downward (by respectively 1% and 0.6%) to scrape together growth of +0.8% and +1.6% in 2016 and 2017, (see table 2).

Moreover, the recent announcement of Brexit could be damaging to South African growth via the negative effects that may be induced by a further depreciation of the rand. Indeed, the Brexit could mean i) sustained and lasting appreciation of the dollar and therefore a decline in emerging currencies besides a strengthening dollar could also penalize the US economy and therefore global, ii) the uncertainties over the future of the European Union which could affect the growth of the area and therefore South Africa (the EU accounts for over 20% of South African exports).

2016.07.01-tab2

3. Political scandal is the major cause of the decline in growth in the first quarter 

There is no doubt that the abundance of political scandals that have come in rapid succession since last winter have weighed down the South African economy through the fluctuations they caused in the rand, which rippled through the entire economy. Since he took power in 2009, President Zuma’s two successive terms have been punctuated by political scandal, giving markets the impression of a real soap opera.

After an initial rape scandal in 2006, when he was still deputy president, Zuma has been caught up in scandals over various cases of corruption and fraud. In autumn 2015, he refused to arrest Sudanese president Omar al-Bashir under an international arrest warrant during al-Bashir’s trip to South Africa, which led to the filing of the first motion to impeach him (100 votes in favour, 211 against, out of 400 members of parliament).

In December, three finance ministers were appointed in the space of a week. The dismissal of Minister Nhlanhla Nene was followed by that of David Van Rooyen, a relatively unknown member of parliament who was close to the President family. Market confusion led the rand’s value to fall precipitously, hitting an all-time low mid- January of ZAR 16.92 per USD, due to concerns over whether his appointment was an informed choice or the result of the president’s well-known penchant for cronyism (see Chart 5). Under pressure, several days later he nominated a figure that financial markets know and respect: Pravin Gordhan, who had already served as Minister of Finance during his first term.

Despite this reassuring appointment, Mcebisi Jonas, Deputy Finance Minister, announced in March that the Gupta family, who are well known in the South African business world and friends of the President, offered him the job of Minister of Finance. In light of these events, it is tempting to ask which is worse: that the offer came from the Guptas themselves, or the determination to once again dismiss a credible minister who was appreciated by financial markets?

Despite this reassuring appointment, Mcebisi Jonas, Deputy Finance Minister, announced in March that the Gupta family, who are well known in the South African business world and friends of the President, offered him the job of Minister of Finance. In light of these events, it is tempting to ask which is worse: that the offer came from the Guptas themselves, or the determination to once again dismiss a credible minister who was appreciated by financial markets?

While President Zuma’s credibility was already heavily tarnished, his refusal to return public funds used to renovate his second residence, k nown a s Nkandla, triggered a second impeachment bid in April. Despite the failure of the motion filed by the Democratic Alliance (143 for, 233 against), it is clear that the integrity of the president, who was found guilty of failing to uphold the Constitution, is firmly in question.

The “misunderstanding” in May over the possible arrest and investigation of Pravin Gordhan seems to confirm the will to undermine a Minister whose moral rectitude may get in the way of the President and his “business”.

Conclusion

But there you have it. Zuma’s amateurishness and scheming have infuriated some of biggest names in the majority party, the ANC. Jonas’ revelations prove it. Criticism has become increasingly thick on the ground and five of six ANC leaders1 have even tried in vain to convince Zuma to quit after the Constitutional Court ruling in early April.

The upcoming August elections are now in the hands of the people, but at the pace with which scandals are erupting, the ANC could very well implode before then. It could be that public opinion takes Nelson Mandela’s advice to heart: “If the ANC does to you what the apartheid government did to you, then you must do to the ANC what you did to the apartheid government. A split in the AN C would seriously destabilise the political system, inevitably resulting in disastrous short-term consequences for the South African economy.

1 Deputy President Cyril Ramaphosa, Secretary-General Gwede Mantashe, Deputy-Secretary General Jessie Duarte, Treasurer Zweli Mkhize and Chairwoman Baleka Mbete

 

 

 

 

 Q1 2016: the start of a recession?

 

 

2016.07.01-1

 

  The rand's substantial depreciation has resulte in inflationary pressures that have negatively impacted the economy

 

 

2016.07.01-2

 

An extremely contrained policy-mix

 

 

2016.07.01-3

 

A substantial downward revision of our growth forecast

 

 

Between all kinds of political scandals, cronyism,financial malfeasance and attempts to discredit respected figures, President Zuma may have gone too far

 

2016.07.01-4

 

2016.07.01-5

 

An implosion of the ANC would have disastrous consequences for the African economy, at least over the short term

 

 

Publication finalised on 29 March 2016 

Karine HERVE, Strategy and Economic Research at Amundi
Gwendoline IBRE, Strategy and Economic Research

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