Maarten Ackerman, Advisory Partner and Chief Economist, Citadel
Towards the end of May 2017 the International Monetary Fund upgraded their 2017 growth forecast for South Africa to 1%. Markets reacted with surprise given the spate of recent investment grade downgrades the country has faced, with Moody’s verdict still pending their June announcement.
The fact is that economic growth at 1% is negligible and, in fact, South Africa’s population growth outpaces this number by almost 0.8% which implies that we are getting poorer despite having positive economic growth.
South Africa has seen little growth these past few years, leading some to label it the “wait-and-see” economy. While the world’s economy grew slightly more than 3% last year, South Africa clocked growth of just 0.3%, largely due to embedded structural issues weighing on potential growth. Indeed, in recent years South Africa’s growth has fallen further and further behind its global peers.
Until 2011/2012, as shown in the graph below, South Africa’s economic growth largely correlated with that of the rest of the world. Being an open economy it benefitted from globalisation, Chinese industrialisation and the resulting commodities boom from 2000 to 2007. Similarly, it couldn’t avoid the negative impact of the global financial crisis in 2008.
However, things started to shift thereafter. Maybe it was what happened at Marikana. Maybe it was a confluence of factors coming together at that moment which resulted in a sharp deterioration in consumer and business confidence weighing on new fixed investment and dragging economic growth down with it.
More and more local and international companies are looking elsewhere for sustainable growth opportunities, believing that they can earn higher returns on other shores.
This lack of trust and confidence in the South African economy has resulted in a lack of investments, especially foreign direct investments. Indeed, since then fixed investment has declined sharply over the past 10 years as South Africa received significantly less foreign investment compared to the emerging market peer group, including sub-Saharan countries. Lower new capital expenditure results in less expansion of productive capacity, fewer jobs, greater reliance on imports and lower economic growth.
If you exclude the fixed investment figures, the service, retail and consumer scores – to name a few – still seems reasonable, given the current economic environment. But without growth on the productivity side these are sustainable only to a point.
Lack of sufficient economic growth and increased productive capacity lead to lower tax revenue, which will place further pressure on government finances and likely result in an even larger budget deficit. This increases the risk of further rating downgrades in future.
With recent political and policy uncertainty, coupled with other issues such as structural unemployment, labour force red tape, inequality and infrastructure deficits, the potential for a recovery in foreign direct investment seems unlikely in the near future.
One thing is sure, though, the current local growth deficit together with other factors such as the inflation and interest rate difference between South Africa and the USA, a sticky current account deficit (despite some recent improvements) and recent downgrades, should eventually weigh on the rand.
The current relative strength of the rand despite these issues is a reflection of a fickle global risk appetite which is currently in favour of emerging markets. Long term fundamentals will ultimately drive currency sentiment, and the fundamentals don’t support current currency rates. When sentiment changes, and it will – and it can happen quickly – this tailwind will disappear.
To turn this situation around we need meaningful growth: the kind of growth that lifts people out of poverty; the kind of growth that moves the country forward and takes everyone along with it. Simply put, we need inclusive growth. Until we see a return of political and policy certainty, confidence and trust will remain under pressure and the wait-and-see economy is likely to continue.