Plunging confidence in SA’s future continues to be fueled by a barrage of bad news. From political infighting within the ruling party that risks further social unrest, to a floundering education system, entrenched corruption and a lack of law and order, the country indeed has many weak points. However, analysts that focus only on SA’s bad news, risk missing the significant improvements the country has seen recently which could boost growth expectations beyond the more conservative recent forecasts.
This is according to Old Mutual Investment Group, whose Chief Economist, Johann Els, told media at a press briefing this week that, apart from the shift to a democratic society, the recent energy reform announced by President Ramaphosa last week, is the most consequential structural reform seen in South Africa to date.
South Africa already has a number of positives going for it, such as strong institutions, a strong constitution, independent judiciary, a politically stable democracy with entrenched rights and a free media, a strong financial sector and generally healthy corporate sector, and easing fiscal crisis risks and capable new minister of finance. But Els highlights that policy reform, such as what we saw last week around the energy sector, could prove to be the turning point to lift confidence in SA.
“To lift growth towards 4% to 5% on a sustained basis, we need to see massive privatisation. Outright privatisation, as such, might never happen, but the increased role of the private sector in traditional government/SOE functions – which we’re starting to move towards with this emergency energy plan – could be seen as privatisation by stealth,” he adds. “However, we still need to see more crucial reforms such significant labour market deregulation, education system reform and a stronger social compact between Government, labour and business.”
SA’s growth path is changing from a downtrend to an uptrend, says Els, with his expectations now heading towards 2.5% annual average GDP growth over the medium term. This is a noteworthy shift from the pitiful 1% per annum over the five years to 2019.
When it comes to the question of whether SA will be dragged down with the global economic slowdown, he points out that the country is in a far better position than at previous times of similar global circumstances.
“Globally, we are seeing slowing growth indicators, with increasing risk of a global recession, and global inflation is likely to roll over soon, with US PCE inflation likely to ease before CPI inflation. The Fed’s message is therefore likely to change and we also expect an uplift in Chinese growth momentum,” he highlights. “But the risks are not insignificant in the global environment, particularly the recession risk, which is rising sharply.
Regarding the impact of this risk on SA, Els is optimistic. “SA’s inflation problem is less severe than that of global inflation, while the current account is in a strong surplus position thanks to supportive commodity prices, and the global outlook is also not as deeply negative, given the policy support and likely growth momentum lift expected in China,” he adds. “The SA growth outlook for this year and the medium term should also be rand supportive, and, while SA rates will still need to normalise more, there is no need for the SARB to be as aggressive as the Fed. So, no, I don’t see SA being severely impacted by the global downturn as I believe we’re in a position to better withstand the pressure than in the past.”
The SA economy should recover in the second half of this year, according to Els. “Manufacturing PMI was hard hit by loadshedding and the whole economy PMI is still in expansionary territory, but the leading indicator is easing,” he explains. “Inflation is now likely going to stay above 7% until September or October, moving down to around 6% by December and 4.5% by the end of 2023. Services inflation is still low, while consumer goods inflation rates have been under upward pressure recently, but should peak soon. Consumers are likely to experience less price pressures going forward as businesses won’t be able to pass on the price increases that they did previously, when consumers were more willing to accept increases.”
Ultimately, Els believes that confidence in SA is set to improve, and SA economic growth needs sustained stronger confidence if it is to get on a better footing. “Radical Economic Transformation is certainly happening in the country, but not the kind that has concerned us to date,” he says. “Rather, policy is shifting to the right of centre in SA, with increasing emphasis on the private sector’s involvement in the economy, a hugely promising prospect for the future of SA.”