28 Feb 2018
While the rand has recouped its losses from the effects of Nenegate in late 2015/early 2016, it has yet to fully recoup the losses of the past near decade.
Financial crises come and go, and the rand tends to revert to prior levels once the crises have passed, for example the rand spiked in 2008 and in 2001, then returned to pre-crisis levels.
The most recent lengthy crisis of investor confidence for South Africa lasted from 2009 until recently, and has led to depressed levels of business sentiment. The deterioration in key institutional strengths during the period weighed on the rand.
Breaking the trend – now to deliver
This direction in the rand has now been convincingly broken. The new leadership of SA is expected to deliver free market reforms and a supportive environment for the private corporate sector, leading to a recovery in economic growth from the doldrums it has sunk to. Substantial foreign portfolio inflows, with net purchases of R47bn worth of equities to date, underpins this trend.
We have improved our rand forecasts somewhat, but the domestic currency’s likely stronger path will depend on the free market reforms necessary to repair South Africa’s institutional strengths, and for these to take place as soon as possible.
Failure to deliver both on the pro-private sector business and investment stated intentions, and to eradicate state capture, corruption and poor governance would see business confidence flag. The rand would then then subside down to the previous levels, taking the hope of fast economic growth and employment down with it.
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Thumbs up to SONA
The SONA has not disappointed, revealing that boosting business confidence and private sector-led growth are firmly on government’s agenda. So therefore is the need for substantial private sector job creation over the next five years.
Reducing the size of the state and tripling the size of the private business sector through business-supportive strategies, as well as transformation through growth and substantial additional employment, are the only sustainable methods (which must occur in tandem) to eradicate poverty and inequality, and reduce unemployment to single-digits in the long-term.
While the exchange rate has moved into the previous up case currency forecast range, it will take more to lift the economy to the GDP growth rate levels of the up case.
Feeding into the economy
The reduction in political uncertainty has fed rapidly through into the domestic currency, but will take a substantially longer time to feed through into the economy.
While the early business confidence reading shows a lift, nothing is available yet on fixed investment, GDP growth or consumption for 2018. GDP growth is now expected to be slightly stronger in 2018, at 1.5% y/y compared to closer to 1.0% y/y previously, and at 2.0% y/y in 2019 from closer to 1.5% y/y.
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The impact of the global economy
Globally the lengthy low volatility period in financial markets has been broken. The sudden global risk-off sentiment has knocked the rand among other currencies.
Subsequently, stock markets have recovered some lost ground, as the correction has proved welcome in an environment that was becoming overbought.
Last year the risk of a financial crisis was being debated, not least due to the growing time-period since the previous one, with a higher interest rate environment seen as a risk for
increased corporate stress.
Threats and opportunities to growth and ratings
South Africa’s growth rate this year could be brought back towards 2016’s 0.3% y/y if private sector spending power stalls (on excessive tax hikes which fortunately did not materialise at the Budget, where VAT was hiked by only 1 percentage point).
The credit rating agencies worry about SA’s anaemic economic growth rate, and the concomitant poor GDP per capita performance, just as much as they worry about fiscal consolidation.
Should SA avoid a Moody’s credit rating downgrade in Q1.18 the rand could strengthen somewhat further, but will be constrained thereafter until evidence emerges of stronger GDP growth.
About the author
Chief Economist of Investec Ltd
Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.
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