SONA Preview: SA edges towards a financial precipice

09 Feb 2021

Annabel Bishop

Chief Economist

The 11 February State of the Nation Address (SONA) comes at a critical moment in South Africa's recent history. Unless government articulates a more business-friendly policy agenda and demonstrates real progress in achieving the goals of the ERPP (Economic Reconstruction and Recovery Plan), the country's financial future looks dire indeed. 

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gdp growth graph
Government’s latest growth plan, the ERRP, has seen few short-term goals achieved since its unveling in mid-October. Progress has been mainly diagnostic: establishment of committees, funds and (perhaps counter-productively) increased state employment. 
SA is likely to see economic growth of 2.9% y/y in 2021 as it rebounds from the -7.3% y/y collapse of last year. This muted recovery has been accompanied by an unsustainable expansion in government borrowings and a widening fiscal deficit. Planned government borrowings for 2021/22 sit at R4.6 trillion (86% of GDP), and are forecast to reach R5.5 trillion by 2023/24 (93% of GDP) and 95% of GDP by 2025/26. As these ratios deteriorate and SA sinks deeper into a debt trap,  lower credit ratings are all but guaranteed. The slide towards C-grade categories reflects concerns about a rapidly increasing risk of default. SA’s credit ratings are likely to fall into the single B grades this year already. 
The only way out of this trap is inclusive economic growth. Failure to achieve (as opposed to simply plan) rapid economic growth and cut state expenditure, is now critical to avoid financial collapse. This requires policies that promote private and public sector investment in productive infrastructure and a curtailment of unproductive expenditure on inflated public wages and inefficient SEOs.
On a more basic level, a key factor in SA's failure to achieve sustainable economic growth is the alarming fact that doing business in South Africa is becoming more difficult, not easier. 
With the pace of regulatory reform lagging other economies in the developed and developing world, SA is becoming less competitive as a destination to set up shop or commit fixed investment. The result is lower employment, lower tax revenues and a negative growth spiral. 
Furthermore, the World Bank’s  2020 Doing Business report says “inefficient regulation tends to go hand in hand with rent-seeking. There are ample opportunities for corruption in economies where excessive red tape and extensive interactions between private sector actors and regulatory agencies are necessary to get things done.” This is particularly true of both South Africa’s onerous regulatory environment and its high levels of corruption. South Africa lacks true, unified outrage against corruption."
The 20 worst-scoring economies on Transparency International’s Corruption Perceptions Index average eight procedures to start a business and fifteen to obtain a building permit. Conversely, the 20 best-performing economies complete the same formalities with four and eleven steps respectively. Moreover, economies that have adopted electronic means of compliance with regulatory requirements— such as obtaining licenses and paying taxes—experience a lower incidence of bribery. It's clear that South Africa needs to shorten the time taken to start a business.
Hopefully the president's address will go some way towards reassuring South Africans that government is alive to the dramatic benefits that can accrue from creating an environment that is more attractive to doing business, and to the dire consequences of maintaining our current slide towards the cliff edge.

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About the author

Annabel Bishop

Annabel Bishop

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.



SA economy

January lockdown restrictions have not harmed SA's 2021 growth outlook

2 February 2021


Amended level 3 lockdown restrictions in January should not harm the 2021 growth outlook, unless further restrictions are applied, which is unlikely.

divergent recoveries graph
The seven-day rolling average of new cases of COVID-19 infections in South Africa has slowed to 5 539 individuals, from its peak in the current wave of 19 042. A downward trend has been maintained, now well below the peak of the first wave, with 2 548 new cases a day.
New daily COVID-19 infections at the origin of the second (current) wave have declined noticeably (Nelson Mandela Bay), and further afield, with SA’s fatality rate moderate due to its youthful population. The rand reached R14.89/USD today as new daily cases moderated.
Level 3 restrictions have been eased somewhat, with alcohol sales allowed Monday to Thursday 10am to 6pm, onsite consumption of alcohol at licenced venues from 10am to 10pm and the sale of alcohol from wine farms, micro-breweries during normal operating hours.
Furthermore, all beaches, dams, rivers, parks and swimming pools are now open, with social distancing and health protocols, and gatherings remain limited to 50 indoors, 100 outdoors, not exceeding 50% of capacity. However, SA remains at risk of a third, and even fourth wave.
While South Africa is expected to begin administering vaccines this month, if in limited quantities, it will still be many months before the entire two thirds proportion of the population is covered, and so before social distancing and economic restrictions can fully ease.
The progress towards herd immunity (two thirds of populations fully vaccinated, including likely all the elderly, vulnerable and health care workers/other essential services) generally is slow, with the US only vaccinating 10% of its population so far, and the UK 14%.
In South Africa 1.5 million doses of Oxford-AstraZeneca for health workers have arrived and it is reported that SA is securing another 20 million from Pfizer, 12 million from COVAX, 9 million from Johnson & Johnson, reaching 40 million in total. 
Domestic economic growth will depend heavily on the degree of the regulated lockdowns on economic activity, and the necessity to substantially ease the regulatory burden on private sector businesses, while lifting civil servants’ productivity.
Economic activity is expected to rise by 2.9% y/y this year, but the deep scarring the domestic economy has already experienced from the harsh regulated shutdown of economic activity last year is likely to be persistent until 2024 in real terms.

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mboweni sa economy

Tough times ahead for SA economy

25 June 2020


The 2020 Supplementary Budget Review projects a sharp deterioration in government debt. if SOE contingent liabilities are included, SA's debt:GDP looks set to grow to around 100% by 2023/24, with further ratings downgrades on the cards.

Wednesday's Supplementary Budget Review shows that this decade is expected to begin with a massive plunge in the health of government finances, with a fiscal deficit of -14.6% of GDP and gross debt as % of GDP of 81.8 projected for this fiscal year, versus the previous projections of a fiscal deficit of -6.8% of GDP and debt at 65.6% of GDP for 2020/21. 
The rating agencies are likely to downgrade SA further on the back of this budget, as the key objective of any credit rating agency is to assess the ability of a country (or corporate) to repay its debt, and with SA now signalling that its debt burden will rise to 87.4% by 2023/24 this has deteriorated SA’s ability to repay its debt.
It is not possible to continuously borrow out of debt, nor to indefinitely borrow to make debt payments, and fund current expenditure. Debt interest payments do have to be made to avoid default. SA is on a negative outlook from Moody’s, at Ba1 (BB+). The rating agencies will likely downgrade SA after the budget, if not in November 2020, then sooner. 
Some limited positive news emerged from the adjusted budget today, and that is the announcement that SA’s debt is projected to peak at 87.4% by 2023/24, as opposed to pre-budget ‘leaks’ that SA’s debt is further estimated to rise to 90.9% by 2023 and over 100% by 2025, climbing to a massive 113.8% by 2029.
However, SA has been falling though the credit ratings increasingly quickly, and is at BB from Fitch (for both its foreign and local currency ratings), while from Standard and Poor’s SA’s local currency rating is BB but its foreign currency (country) rating is BB-.  The next step after BB- is single B, followed by the C grade ratings and then D, for default.
While SA projecting a peaking, and hence stabilisation of debt is positive, it will not be enough to avoid SA being pushed into the single B credit rating categories over the course of the next few years, with 87.4% still a huge figure for an emerging market’s government debt, and one which does not tally with debt sustainability.
This is particularly because the credit rating agencies tend to look at SA’s debt in conjunction with that of its guarantees that it has extended to the State Owned Entities’ debt, and the calculation, when including all these contingent liabilities takes the figure to around 100% of GDP by 2023/24. 
The biggest risk SA faces in its massive quantum of debt issuance is investor appetite, which, while strong will not last forever. SA will likely run out of space in the domestic market, which is the biggest absorber of SA’s government debt, as SA has a limited quantum of savings, which have been used to mostly fund government issuance so far.
Furthermore, government is increasingly eyeing private sector savings to fund its infrastructure projects, via prescribed or voluntary assets, with pension funds already a very large holder of state debt.  The huge ramp up in projected debt and issuance is at odds with the limited savings pool in SA, and will add to pressure for further credit rating downgrades. 

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Economies open as Covid-19 infections rise


5 June 2020


The impact of the Covid-19 crisis is deepening poverty, hunger and unemployment around the world. The  opening up of economies continues, but recovery will be impeded by lagged effects

This week the number of confirmed cases of Covid-19 have exceeded 6 million globally, at 6.4 million versus 5.6 million a week ago, while the number of deaths are at 382 867 versus 353 334 a week ago. With the epi-centre of Covid-19 now in Latin America, the region also faces an economic and health crisis from the effects of the spread of the pandemic.
Latin America suffers from substantial inequality, with weak public finances and fragile health systems. In Brazil Covid-19 cases and deaths are surging, while politically the country is seen to be becoming more unstable, suffering also from poor responses to the crisis, with GDP contacting by -1.5% y/y in Q1.20 and expected to drop a further – 9% y/y in Q2.20. 
The number of Covid-19 cases in Brazil are around 600 000, with above 30 000 new cases a day now in a population of just above 200 million. Chile (population 19 million) and Argentina (45 million) are seeing fewer confirmed cases but are smaller populations, with their respective Covid-19 reported infections approaching 120 000 and respectively 20 000.  
Chile’s economy contracted by -14% in April, and prolonged lockdown measures are expected to see a deeper contraction in May and June, with the country also suffering from social unrest. In Argentina economic activity fell 11.5% in March, with worse expected in Q2.20, and it defaulted on a US$500m payment, and is in restructuring talks with bond holders.    
In Columbia, Covid-19 cases are around 30 000 with a population of 50 million, with its government lifting restrictions incrementally, while its economy is seeing very depressed consumer sentiment and its manufacturing sector also having shown deep contraction.
Mexico is at around 100 000 cases (population 129 million), and is expected to see the deepest recession in Latin America, of -13.0% y/y in Q2.20, -9.2% y/y in Q3.20, -6.6% y/y in Q4.20 and -4.2 y/y in Q1.21, after contacting by -1.4% y/y in Q1.20. The lockdowns in the US are also negatively affecting activity in Mexico. 
In South Africa, there are 40 792 confirmed cases of Covid-19 to date, with 848 deaths, as the country with a population of 59 million is expected to see a deep recession this year. Public opposition to the lockdown restrictions are rising sharply, while incomes fall and a survey on hunger shows an increase from 4.3% to 7.0% in respondents.
The survey from Statistics SA, on the impact of Covid-19 on employment and income in South Africa, conducted between 29th of April and 6th May, with no updated report published yet, also shows that “the percentage of respondents before who reported no income increased from 5.2% before the lockdown to 15.4% by the sixth week of national lockdown”.
Many individuals in South Arica are using savings, UIF payments, loans from family and friends, investments and social payments other than the UIF to survive, but all these sources of income will be eroded, and without a rapid opening up of the economy, will see more sink into deep financial hardship and so retard the recovery of economic growth later this year.

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Business cycle

Impact of lockdown on GDP


26 May 2020


GDP is at risk of contracting by between -8.0% y/y and -10% y/y, if not worse this year, on the lengthy, severe lockdowns

March 2020’s leading business cycle indicator, released today by the Reserve Bank, lifted to 104 from 103.3 in February. The around six-month lead (between the leading indicator and GDP growth) indicates that with Q1.20 at 103.4, down on Q4.19’s 104.0, Q4.20 GDP would be on track to see a contraction.
However, the data used was for Q1.20 and does not capture the worsening conditions of the extended lockdown, globally or domestically. With the lengthening of the lockdown (May level 4, June level 3), from April’s virtually total shutdown of level 5, Q2.20 GDP could see a sharp contraction of around -50% qqsaa or worse, while Q3.20 is likely to see less of a rebound than previously anticipated.
With the current progression of one month for each level, July and August will see some continued restrictions on economic activity, and the recovery in Q3.20 is likely to be much more subdued than originally thought. Instead of a rebound of 40% qqsaa in Q3.20 it could instead be around 15% qqsaa.
Furthermore, it is not certain that the levels will see a linear monthly progression, levels could go up as well as down, while companies themselves are at risk of temporary closures if infections occur.
The use of the Q1.20 leading indicator (released today) as a pointer of future business activity has been dramatically diminished by the impact of the Covid-19 crisis.
We previously expected economic growth of -4.8% y/y for 2020, but now believe it could come out closer to between -8.0% y/y to -10% y/y, if not worse. Much will however depend on the progression of opening up the economy. The very slow pace so far has driven our worsening forecasts, as has the sheer length of the lockdown to date, which has seen incomes fall (both due to rising unemployment and firms cutting back on staff renumeration versus last year), and demand to collapse.

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MPC preview


19 May 2020


Interest rates are likely to remain lower for longer in South Africa, at this week’s MPC meeting a small rate cut is likely

South Africa has seen a 2.25bp cut in interest rates this year, 200bp in direct response to the impact Covid-19 has had on the economy and financial markets, as the crisis deepened. The first cut, of 25bp in January, was in response to the recession SA had fallen into in the second half of last year, given that inflation was subdued into the target range close to the midpoint, and expected to remain there over the forecast period.
Indeed, this year we expect CPI inflation will come out at 3.4% y/y, and at 4.1% y/y in 2021, although we believe the risks are for even lower outcomes. At the last MPC meeting, the emergency meeting in April, the MPC forecast CPI inflation at 3.6% y/y for this year and 4.5% y/y for next year, but we believe these forecasts will be lowered at their meeting this week, to closer to 3.4% y/y or below for this year, and to closer to 4.0% y/y for next year. 
This week’s MPC meeting is likely to see a further downwards revision to the Reserve Bank’s GDP outlook, particularly for 2021, as the lockdown is proving lengthy and severe. We expect however that the SARB (South African Reserve Bank) will not engage in another large (100bp) cut in the repo rate this week, preferring instead to preserve some room to implement further easing later in the year, should conditions worsen even further.
We expect that the MPC will deliver a modest cut of 25bp this week, but there is a possibility it chooses to keep interest rates unchanged, giving the immensity of the cuts at its last two meetings. Keeping its powder dry by leaving rates unchanged or providing only a small, 25bp cut, in the face of a potentially much larger contraction in GDP than is currently widely expected would allow for more support later.
GDP risks contracting by closer to -10% y/y to -15% y/y this year due to the very slow reopening of the economy that is occurring, and the extreme nature of the lockdown. South Africa has seen one of the most severe economic lockdowns globally, and its lengthy duration (with level 3 now only expected by June)  will likely see the domestic economy contract by closer to -10% y/y to -15% y/y this year. 
Interest rates are likely to remain low for a lengthy period of time, as the economy will not recover in Q3.20,  nor will it recover in Q4.20, or in 2021. Many years of growth will have been wiped off GDP and it will be a slow lengthy process to rebuild. Unemployment risks rising to 50% next year. From an inflation point of view, the SARB is in no rush to hike interest rates. 
The uncharted territory South Africa and the rest of the globe is in has created enormous uncertainty.  In South Africa the government has warned that levels will be raised if necessary (the lockdown intensified) which would severely worsen the GDP outcome. Covid-19 has not yet peaked in SA and it is quite a while before it is expected to do so.

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More job losses as lockdown continues


15 May 2020


The pace of South Africa's Covid-19 ratio of deaths to infections slowed substantially from mid-April, with lockdown restrictions only seeing some relatively mild easing, while job losses shoot up 

The pace of South Africa's Covid-19 deaths to infections ratio slowed materially from mid-April, both in terms of new infections and deaths, and total deaths and infections. Lockdown restrictions have only seen relatively mild easing while job losses shoot up. Experts on Covid-19 have warned it will be impossible to eliminate the virus.
South Africa’s low fatality rate, below that of the global rate, reflects also a low infection rate, but even with the extremely severe lockdown the country has been under (one of the most severe in the world), the virus has spread, and will continue to spread, with global evidence now warning it will become endemic, and is unlikely to be eradicated.   
A vaccine is deemed unlikely this year, and herd immunity (when over 60% of the population has had the disease) is the most likely path. Studies have observed that the number of deaths globally are likely to be lower than expected. It is well reported that children under 18 have an extremely low likelihood of the disease, especially death from it.
Experts have said that the spread of the disease is impossible to prevent. Global figures have shown that Covid-19 tends to cause essentially no symptoms in around 70% of cases, while around 25% of cases show mild symptoms, and the remaining 5% (typically the elderly or those already severely ill before Covid-19) see severe symptoms with a risk of death.
South Africa continues to see a very cautious approach to lifting its economic lockdown restrictions, while the damage caused to the economy is ramping up. South Africa has yet to see level 3 reached, and the circulation of money has collapsed, with the companies that are open (recently surveyed at over 50%) still seeing turnover negatively impacted.
South Africa's severe, lengthy lockdown could see the economy contract by more than expected in 2020, closer to -15% y/y than the latest consensus estimate of -6.4% y/y (Bloomberg) if the very slow pace of opening up persists. This would cause formal unemployment to escalate more rapidly, risking a rise ultimately beyond 50%.
South Africa’s Covid-19 infections are still on an upwards trajectory, while a number of other countries have seen cases of new infections peak. However, globally there are now concerns of a second round of infections, or even of multiple waves of infections, driving the globe inevitably towards herd immunity.
Around the world the impact of restriction measures in the face of Covid-19 has had a severe, dire impact on economic activity, employment and so livelihoods. South Africa has been at the pace of one level of lockdown a month but the economy is in the process of losing several years of development and will not recoup these losses in the medium-term.
The incoming data on April, the first full month of lockdown and the most severe period of lockdown to date, has shown that electronic bank transactions in the economy, which is reflective of business activity and the circulation of money, is at a fourteen year low in real terms (removing the distorting effects of inflation) – BankservAfrica data.

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SA economy expected to contract 


8 May 2020


A meaningful recovery from recession, globally and domestically, will depend on the rapidity of exit from lockdown restrictions, broad based support measures and for SA particularly, a substantial easing in red tape

Globally, the advent of the easing of lockdowns turned attention to the prospects for economic recovery, boosting some financial market sentiment. However, a slower than hoped for pace of easing of restrictions would disappoint markets, and a return to temporary risk-off is not unlikely, particularly if a second wave of infections/ lengthening of lockdowns occur.
Economic expectations of the impact of Covid-19 on the global economy continue to adjust, with economists slightly less pessimistic about the global economic outlook than a week ago according to the latest Focus Economics survey, but risks are still seen as heavily skewed to the downside.
In South Africa, low survey responses are hampering hard data collection. The economy is expected to contract by -36.2% qqsaa in Q2.20 (Investec forecasts -37.1% qqsaa or -12.1% y/y), with business sentiment already depressed over the past decade, with economic growth weakened by poor state governance and a rapidly rising quantum of red tape.  
The latest Bloomberg economic consensus show’s SA’s GDP contraction this year forecast at -5.0% y/y (Investec -4.8% y/y). However, we now expect there is a rising chance that SA will see GDP growth contract by more than -6.0% y/y in 2020, as government’s pace of easing the restrictions on the South African economy is proving to be extremely gradual.
Already a report from BankServ (the largest automated payments clearing house in SA) analysing actual transactions, shows that in the thirty-eight days to the 3rd of May 2020 (since lockdown began on 26th March 2020 in SA) daily transactions are down sharply, by 49% after peaking in March, as consumer spending plummets.
Specifically, “consumer transactions were down by half of the usual transaction volumes tracked by BankservAfrica’s Point-of-Sale (POS)* and ATM transactions over the corresponding period in 2019”. “April’s month-end was 48% below the norm”, and the “drop in the month-end transaction volumes between March and April was 58%”.   
BankServ highlights that this “reflects a slower start to the April pay month so far. The actual same period in 2019 had a 20% increase in transactions.” “This is a far cry from the average daily spend by consumers that is usually higher at the start of the pay month.”
Cheeringly, “indications so far suggest May 2020 will also be below the norm.” “However, since 1 May 2020, when level 4 restrictions were applied, the average number of transactions processed by BankservAfrica increased slightly to 58% of the usual transaction spend”, proving “a glimmer of hope for a gradual increase in spending over time.”
As lockdown restrictions are eased further, with businesses hoping for level 3 restrictions to come sooner rather than later, the circulation of money in the economy is likely to see some further impetus, but consumer confidence will have been severely repressed in Q2.20, with lockdown also largely eliminating expenditure on big ticket items and many luxuries.

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Another downgrade for SA


30 April 2020


Standard & Poor's downgrades South Africa to BB- from BB (foreign currency rating) with a stable outlook, and drops SA to BB from BB+ on its local currency rating (stable outlook), as SA falls further down the rating ladder 

The onslaught of improved risk sentiment largely overrode the impact of last night’s S&P’s downgrade on the rand. Further credit rating downgrades for SA are still possible, given also ongoing political obstructions to necessary structural reforms (particularly a massive reduction in regulations and red tape) to prioritise sustained, rapid economic growth rates.
Specifically, yesterday evening Standard & Poor’s lowered South Africa’s credit ratings once again, with the foreign currency rating on the sovereign’s long-term debt falling to BB- from BB, with a stable outlook, and the local currency rating on SA’s long-term debt fell to BB, from BB+, also with a stable outlook.
S&P highlighted that “South Africa's already contracting economy will face a further sharp COVID-19-related downturn in 2020” as “the broader economic fallout will be very difficult to handle, and South Africa entered the crisis from a weak fiscal and economic position.” ”The appreciably weaker macroeconomic environment will also weigh heavily on … fiscal revenues”.
S&P adds, “(i)n the second half of 2019, the economy shrank, due partly to a set of severe rolling power blackouts. The COVID-19 health crisis will create additional and even more substantial headwinds to GDP growth, owing to a strict five-week domestic lockdown, the markedly weaker external demand outlook, and tighter credit conditions.”
“As a result, we now project the economy to shrink by 4.5% this year compared with our November 2019 estimate of growth of 1.6%.” ” A proactive policy response, including South Africa's decision to go into a strict lockdown relatively early, has so far limited the health impact of COVID-19. Early gains in tackling the virus will be built upon”. 
Early this morning the rand did weaken briefly to R18.23/USD, R19.81/EUR and R22.70/GBP in response to S&P’s downgrade as the country’s ratings fall closer to C grade. South Africa’s R800bn Covid-19 relief is expected to place great strain on government’s finances, while tax revenues underperform substantially due to the lockdown.   
Concerns over SA’s fiscal deficit and debt levels have been rising in general, with a Bloomberg’s consensus now showing forecasts of a fiscal deficit in excess of -10% of GDP for 2020, and close to -10% of GDP in 2021. In 2022 a deficit of -8.5% of GDP is expected, as the impact of Covid-19 on government finances is expected to prove long lasting.
The borrowing requirement will rise substantially, and S&P sees “net debt levels rising to over 75% of GDP by the end of 2020” and “to 84.7% by 2023, raising questions around debt sustainability”. Credit rating agencies common primary function is to assess entities ability to repay debt, and SA’s ability has deteriorated materially.

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Tito Mboweni

R500bn stimulus package for South Africa’s economy


22 April 2020


The R500bn stimulus package for South Africa’s economy (close to one tenth of GDP) announced last night is well targeted – but efficient, effective implementation will determine how successful it will be

With the impact of Covid-19 rapidly developing, the global recession is increasingly expected to be worse than previously thought, with a deep, lengthy downturn exceeding 2008-09s. South Africa is also seeing forecasts for its GDP revised significantly lower, with many tending towards the -5% y/y to -10% y/y range, up from smaller contractions initially forecast.
President Cyril Ramaphosa’s announcement of a R500bn fiscal stimulus plan for South Africa last night is near 10% of GDP, and was not chosen lightly. The R500bn support package is well targeted, with a high focus on providing bridging finance for corporates (R200bn), as well increasing healthcare and providing some measures of alleviation of poverty.
Specifically, the package is broken down into a) an extra-ordinary health budget, with R20bn for healthcare for in the face of Covid-19 Relief, b) relief from hunger and social distress, including R50bn for temporary 6 month Covid-19 grants, increasing existing grants, food assistance through vouchers and cash transfers and R20bn for emergency water supply.
Furthermore, c) support for companies and workers of R100bn for protection and creation of jobs, and a R200bn loan guarantee scheme for SMMEs (in partnership with SARB, banking sector and National Treasury), and d) a phased reopening of the economy that is risk adjusted, balancing the need to get back to work with the health risks.
The “R200 billion loan guarantee scheme … (is) in partnership with the major banks, the National Treasury and the South African Reserve Bank. This will assist enterprises with operational costs, such as salaries, rent and the payment of suppliers. In the initial phase, companies with a turnover of less than R300 million a year will be eligible.”
The R500bn support package is part of the second phase of government’s “economic response to stabilise the economy, address the extreme decline in supply and demand and protect jobs”. “The third phase is the economic strategy we will implement to drive the recovery of our economy as the country emerges from this pandemic.”
The President also highlighted other measures that occurred in the first phase, including R70bn tax relief measures, R40bn income support for firms unable to pay staff wages, release of disaster funds, while the 2% repo rate cuts have unlocked R80bn for the economy. These three phases make up government’s economic recovery strategy.
“Central to the economic recovery strategy will be the measures we will embark upon to stimulate demand and supply through interventions such as a substantial infrastructure build programme, the speedy implementation of economic reforms, the transformation of our economy and embarking on all other steps that will ignite inclusive economic growth.”
The President’s announcements last night also stated the need for structural reforms and inclusive economic growth. However, South Africa is expected to have been in a three quarter recession before April this year as, the ease of doing business has been deteriorating in SA in the past decade, dragging economic growth down.  

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SA moves to level 4


16 April 2020


The SA's lockdown continues, but some small phased opening up of the economy has been approved by government, particularly in the mining sector, ports and logistics, hardware stores and some informal food traders

Many countries around the world are considering plans to lift restrictions on the operation of their economies (imposed to limit the spread of Covid-19), and are already outlining early phases of reopening parts of their economies, while at the same time (most are) considering the measures needed to avoid restarting a second round of Covid-19 infections.
Chancellor Merkel has appealed for "extreme caution", allowing the gradual reopening of some of smaller shops from next week and schools next month, but adding “(w)e have made some progress. But I do have to stress that this progress is fragile”, “(t)his is a situation in which caution is the order of the day, not foolhardiness.”
German exports are expected to fall by a reported 15% this year (DIHK), with 80% of companies reporting sharp falls in turnovers and pessimistic views on the future, as the pandemic continues to negatively impact global supply chains, and delayed or cancelled capital investment adding to the malaise in Europe’s largest economy.  
New Zealand may begin easing its lockdown next week, although Prime Minister Ardern warned it would not be back to normal. The country is looking at moving from a stage four lockdown, which has seen only food stores and pharmacies remain open, to stage three which includes restaurants reopening for take-aways, along with some other retailers.
President Trump has promised plans today on reopening the US  economy, stating that the U.S. had "passed the peak" of the Covid-19 crisis and that his "aggressive strategy" against Covid-19 was effective, vowing immediate "guidelines" on ventilating parts of the economy, with areas/states evidencing lower infections easing restrictions by 1st May.
The US is reporting a record daily death toll from Covid-19. WHO data shows that for 15th April the US had 578 268 confirmed cases, with 23 476 fatalities so far, and daily 24 446 new cases and 1 504 new deaths. The CDC says the US is “nearing the peak right now”. The US has reported the most fatalities from Covid-19 versus any other nation.
The US has also lost 22 million jobs during its lockdown, eliminating the employment created in its past ten years of growth since its last recession of 2009, with Bloomberg also reporting that a US jobless rate of 15% or higher is implied by the recent jobless claims, a high since the Great Depression.
South Africa has amended its lockdown regulations to start reopening a few economic areas, notably mining (which can now operate at 50% capacity) under very strict health regulations. Miners which supply Eskom can operate at full capacity, as well as smelters, plants and furnaces, and refineries to prevent fuel shortages, all under very strict health regulations.
Furthermore, essential items can be sold from hardwares and suppliers of vehicle components under register, logistics and ports can operate for export to decongest ports, bring in cargos currently at ports, and the transportation of cargos from ports and general transportation of essential goods. A further gradual phased opening of SA’s economy is likely.

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Rand tumbles as intrest rate cut is announced


14 April 2020


Rand weakens on SARB surprise 100bp cut announced today, to R18.40, after having closed yesterday at R18.27,      we continue to expect an average of R17.50/USD for Q2.20

The surprise 100bp cut in the SARB’s repo rate today (to 4.25%) takes South Africa’s interest rate cuts this year to 2.25% in total. The repo rate is at a historic low since it was recorded in 1998, the previous low was in 2013 at 5%. The prime lending rate was last at 7.75% in 1973.
After an initial knee-jerk reaction, the rand retracted to R18.26/USD, R20.01/EUR and R22.93/GBP from R18.37/USD, R20.09/EUR and R23.03/GBP, with its close yesterday at R18.12/USD, R19.77/EUR and R22.65/GBP. The SARB has indicated more cuts are currently likely, potentially another 1.25%. The rand saw additional weakness this afternoon.
Interest rates are low globally, with Central Bank rates respectively at 0.1% for the UK, 0.05% for the US, in Europe 0%and Japan at 0.3%. The degree of monetary and fiscal stimulus globally is unprecedented, with the Federal Reserve Bank expanding its assets on its balance sheet under a huge quantitative easing programme.
This will prove inflationary, and in particular will weaken the US dollar over the course of this year (and potentially next), while the huge quantum of liquidity globally is likely to prove yield seeking, lowering risk appetite and driving portfolio flows into risky assets, which include equities generally and emerging market bonds, with the rand expected to benefit.
The rand saw a more marked retracement against the US dollar, than against the euro and the UK pound, around midday, while the gold price rose to US$1 748/oz from its close of US$1 713/oz yesterday,  with the gold price expected to gain further on the impact of global QE (Quantitative Easing). 
Currently however, global financial markets have not yet entered a period of risk-on and risk aversion is still heightened globally. The domestic currency is still at weak levels, and is likely to remain volatile and weak in the near term until evidence for the beginnings of a recovery in the global economy become clearer.
The South African Reserve Bank (SARB) notes currently as well that “global financing conditions are no longer supportive of emerging market currency and asset values. Credit risk has risen back to 2008 levels and about R100billion of local assets have been sold by non-resident investors.”
The SARB adds that “(t)he overall risks to the inflation outlook at this time appear to be to the downside”. Its 2.25% cut in interest rates this year have helped both steepen, and lower the yield curve, along with its substantial operations to add liquidity in the mid to longer-end of the yield curve.
The huge volumes of QE globally makes the interest rate cuts in South Africa easier for markets to stomach, and the SARB is likely to cut rates further to assist SA as additional measures of monetary stimulus occur globally. The rate cuts in SA are likely to keep the rand closer to R18.00/USD - R18.50/USD this month, but strengthening as risk-on emerges.

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South African rand

Q2.20 Macro-economic outlook 2020-25


1 April 2020


Covid-19’s global impact aids SA deeper into its recession, H2.20 is likely to see recovery

South Africa is currently likely to see GDP contract by -2.7% y/y this year, following on from the recession in the second half of last year. Risk is seen to be tilted to the downside however, on both the degree and extent of disruption to domestic, and global, economic activity from the Covid-19 pandemic.

South Africa’s recession this year is expected to be greater than its recession at the time of the global financial crisis just over a decade ago. In 2020 peak to trough a contraction of -4.0%  is estimated, versus -2.5% in SA’s recession that stretched over H2.08 and Q1.09.

The global economy is widely believed to fall into a recession this year, but consensus expectations are currently for the global economy to recover in 2021, and indeed for this recovery to begin in the second half of 2020. 

However, uncertainty is still high and  it is not yet certain how long it will take to contain the virus (flatten the curve globally), and how long the global economy will be negatively affected, with some growing concerns that the negative impact of Covid-19 could drag on into 2021.

Policy support measures announced have been very substantial globally, bringing some stabilization to the financial markets, but the economic shutdowns are having negative effects on incomes, employment and output globally. 

While better understandings of Covid-19 has been gained over the last month from the experiences in other countries (particularly China), uncertainty is still high and it as it is not yet certain how long it will take to contain the virus (flatten the curve globally), and how long the global economy will be negatively affected,.

Indeed, only once it looks likely that the Covid-19 curve has flattened globally and sentiment turned, will economic forecast become clearer. Reducing market risk aversion (uncertainty) from still high levels will be key in driving some recovery of the rand and SA’s other financial market indicators.

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Moody's downgrades SA amid Covid-19 crisis


28 March 2020


Moody's finally downgrades South Africa amid Covid-19 crisis, risks are skewed to the downside not just for SA

After a long process, with multiple warnings, Moody’s has finally dropped SA to sub-investment grade at Ba1, and has also put a negative outlook on the rating – which is now equivalent to the BB+ negative of Fitch. S&P already has SA on BB, and both Fitch and Moody’s are signalling that is the next step for South Africa.
Global economic shutdowns in the face of Covid-19 has caused turmoil, both already in financial markets ahead of the measures and on institution in economies as many large and small corporates face severe weakening of balance sheets, with the economic effect likely already in the region of the recession of the global financial crisis just over a decade ago.

 While there are widespread expectations of such a global recession, the uncertainty is also high as it remains unknow how long it will take to contain the virus, and so how long the global economy will be negatively affected. 
Policy support measures announced are very substantial globally, but the shock could prove worse than currently anticipated, superseding the great recession of 2008-2009 stemming from the global financial crisis, with rissk currently tilted to the downside, depending on the degree and extent of disruption to global economic activity. 

Consensus expectations are currently for the global economy to recover in 2021, and indeed for this to begin in the second half of 2020. Our expectation is similar for South Africa, with a contraction in GDP growth of -2.7% y/y in 2020, with a particularly sharp contraction in the second quarter of this year.

The additional expenditure measures government seeks to institute in South Africa to provide some support in the face of Covid-19 will worsen government finances, as will the contraction in GDP and the negative impact to corporate and household incomes on the shutdown. However, breaking the spread of Covid-19 is paramount, and the costs will be even more substantial if it is not.

Moody’s most recent report on South Africa detailed “(d)ownside risks to growth are both immediate and longer term, relating to heightened uncertainty about the economic impact of the coronavirus pandemic and persisting domestic impediments to growth.” 
The agency added that “(t)he negative outlook (it has instituted on SA’s new Ba1 rating) reflects downside risks to economic growth and fiscal metrics, that could lead to an even more rapid and sizeable increase in the debt burden, further lowering debt affordability and potentially weakening South Africa’s access to funding.”

“South Africa risks another credit rating downgrade, potentially before the end of this year. Moody’s in particular warns that an increased likelihood of “the debt burden … ris(ing) to even higher levels than currently projected, with even greater uncertainty regarding its eventual stabilisation, would exert downward pressure on the rating, as would any indications that the government’s access to funding at manageable costs has structurally deteriorated.” 
Further credit rating downgrades to SA’s sovereign debt would weaken (and add to the volatility of) financial market indicators, negatively impacting the growth and socio-economic outlook. The financial markets have already viewed SA worse than BB+, at closer to B+.


Consumer confidence drops in Q1

17 March 2020

Consumer confidence drops to -9, two index points below the last print, and now at the average of the Zuma years of 2015 to 2019

FNB/BER’s consumer confidence index (CCI) dropped to -9 in Q1.20, below Q4.19’s -7 outcome, with -9 the average towards the end of the Zuma presidency, 2015-2017, when the index dropped to a low of -15 in the 2010s decade. The prior lows were -20 in 2000, and -24 in 1993, both years of financial market crisis, with -36 before that in the period of SA’s partial debt default (1985).
Unfortunately, with Covid-19 likely to spread further in SA, as it follows the trajectory in other countries, SA is likely to see a further fall in the perceived appropriateness of buying durable goods at the time of the Q2.20 survey, and so the consumer confidence index is at risk of falling further in Q2.20.
South Africa will be in partial shut down from the 18th March (schools, thirty five of the land and sea ports, travel bans from high risk countries, mandatory self testing and self-isolation for those likely to be, or who are, infected and social distancing). A further spread of the virus, which tends to accelerate dramatically until it peaks would exacerbate these measures and citizens reactions.
The outlook for the domestic economy has worsened on the Covid-19 pandemic, we now forecast 0.1% y/y for South Africa’s economic growth in 2020, which will negatively impact household finances, and so further suppress consumer confidence in 2020. We could drop our GDP forecast further, to a recession for the year of 2020, should the global and local outlook worsen.  
A worsening of global economic growth negatively impacts SA’s GDP outcome, with demand for SA exports of goods and services suffering, as well as the negative impact on tourism, and income for workers in the industries. A worsening of the domestic outlook negatively impacts employment, production, incomes, profitability and the ability to service debt (for corporates as well). 

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Lesetja Kganyago

Covid-19: Expectations for SA economy

13 March 2020

MPC to weigh up the risk of further substantial rand weakness on a March Moody’s downgrade  against Covid-19 impact on the economy.

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MPC to weigh up the risk of further substantial rand weakness on a March Moody’s downgrade  against Covid-19 impact on the economy.

South Africa faces a very close call on interest rates next week, with the global economy in a severe risk-off phase, and the full economic impact of Covid-19 not yet having been felt, with even few early indicators of the likely severity of the spread of the disease on global growth.
Globally, the economic consensus now expects global growth to be 0.5% y/y to 1.0% y/y lower this year, than the previously expected figure of closer to 3.0% y/y for 2020. The IMF previously forecast global growth at 3.3% y/y for 2020, and the World Bank had 2.5% y/y – due to different calculation methods as well as different countries used in their compilations.
The IMF dropped their forecast for global growth by 0.1% y/y in February, but the World Bank is yet to revise their figure. With global growth forecasts continuously being revised down, the head of the IMF, Kristalina Georgieva, recently “predicted that global growth would dip below last year's rate of 2.9%”. 
We now forecast global growth 0.9% lower than we expected in January. For South Africa GDP growth is now likely to come out at 0.1% this year, due to the impact of Covid-19 on global growth and hence on demand for SA exports of goods and services, as well as the negative impact of load shedding which is proving to be more severe than Eskom initially indicated.
The global risk sentiment environment has deteriorated materially, and the rand is close to R16.50/USD currently. We expect a 25bp cut at the MPC meeting next week. However, the risk of a Moody’s downgrade at the end of the month could scupper the chance of this rate cut, given that it could push the domestic currency towards R18.00/USD if the current severe risk-off environment in global financial markets persists.

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Tito Mboweni

2020 Budget: Spending cuts won't offset revenue shortfall

26 February 2020

Mboweni promises lower expenditure, particularly on the wage bill. But cuts are insufficient to offset revenue shortfall and debt projections are largely unchanged since the 2019 Medium Term Budget Policy statement. That bodes ill for SA's Moody’s credit rating. But the agency is likely to hold it's current investment-grade rating until November.


The 2020 Budget finally delivered the actual cuts to its expenditure projections (R156bn) that have long been deemed necessary, although the downwards adjustments are not as large as are needed, given also the downward revisions to revenue projections in earlier years, which helps debt projections remain unchanged at above 71% of GDP in 2022/23.
The Budget does not consequently offer enough to see SA’s credit rating outlook return to stable (no downgrade indicated), after it was dropped to negative in November last year to show the agency’s intention of downgrading SA within eighteen months. However, the Budget offers some factors which could help avoid a downgrade on 27th March.
This does not mean SA will not remain in line for a downgrade within eighteen months of first November 2019, but rather that Moody’s will take a large portion of those eighteen months to decide, possibly even stretching the decision in 2021 if SA continues to show incremental efforts to consolidate its finances.
The 2020 Budget is not an austerity budget, it guards against quickening the downwards trend in economic growth in SA by avoiding material tax increases, and indeed aims to quicken economic growth by seeking to reduce corporate taxes, and adjusting for fiscal drag this time around, and not implementing a VAT increase to assist households in SA. 
The rand consequently strengthened in response, to R15.11, R16.42/EUR and R19.53/GBP from a high reached today before the budget of  R15.35/USD, R16.71/EUR and R19.89/GBP, as markets favoured the outcome of the Budget somewhat, in particular showing relief at the avoidance of any draconian tax hikes.
Indeed, weak economic growth continues to see revenue projections lowered, and indeed the Budget drops its 2020 GDP projection to 0.9% y/y in 2020 (previously 1.2% y/y projected in the 2019 MTBPS), 1.3% in 2021 (previously 1.6% y/y) and 1.7% in 2022 (previously 1.7% y/y). 
Fiscal slippage is apparent in the fiscal deficit, but the debt to GDP projections remain largely unchanged for 2022/23 at a very unhealthy 71.6% of GDP for an emerging market, and 61.6% of GDP for the current fiscal year, with above 60% of GDP generally seen as unsustainable for an emerging market.

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Tito Mboweni image

Budget 2020: Expect fiscal deficit to widen

24 February 2020

A widening of the fiscal deficit is anticipated in the 2020 Budget, underpinned by weaker economic growth than previously projected

Since the tabling of the medium term budget policy statement (MTBPS) in October 2019, economic growth prospects have softened further, with recorded headline GDP for 2019 anticipated to be less than 0.5% y/y, lifting moderately to around 0.8% y/y in 2021.
Stated reforms have been slow to implement, with confidence at historically low levels. Faced with a low-growth scenario, maintaining government’s policy commitments continues to be challenging. 
Considering the revenue and expenditure side measures already undertaken by Treasury, along with slower CPI inflation and nominal GDP growth, we anticipate the consolidated budget deficit to be slightly higher than forecast (MTBPS) at 6.1% of GDP in 2019/20. The tightening of fiscal levers (adjustments to revenue and expenditure projections) is key to rebuilding confidence and avoiding further credit rating downgrades. 
Eskom remains a key drag on the fiscus and government guarantees on its debt is a major concern for rating agencies, a workable, transparent solution to deal with the utility’s spiraling debt, needs to be conveyed timeously, as ratings agencies deliberate SA’s sovereign position. 

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Moody's rating image

Moody’s March review: SA credit watch unlikely post Budget 2020

21 February 2020

Moody's country review of SA in March will probably not see SA placed under credit watch, regardless of the content of next week's budget. That's because Moody's will already have all the information it needs to either revise its current negative outlook or to downgrade the country's credit rating. 

On Wednesday, 26 February, South Africa's Minister of Finance, Tito Mboweni, will deliver a make-or break-budget speech, which will in all likelhood keep SA’s debt to GDP projections fairly similar to those of last year's Medium Term Budget Policy Statement (MTBPS). It's this debt to GDP ratio that prompted Moody’s to place SA on a negative outlook.
A less likely outcome is that the budget will materially lower the debt to GDP projection, but this would require significant spending cuts. The 2019 MTBPS predicted lower revenues due to a material deterioration in the economic growth outlook, while expenditure projections grew,  pushing up debt projections. 
The public sector wage bill is a key factor. While the Treasury would no doubt like to see only inflation-adjusted increases for public sector and SOE employees, this may be difficult in the current political climate. Govenrment has a record of flip-flopping on wages and the implementation of structural reforms remains log-jammed.
Additional expenditure allocated to Eskom to keep it afloat has also been a drain on government finances. Earlier this month it looked like Cosatu had formulated a plan to rescue Eskom by halving its debt. Had this proposal been accepted, the result would have been a lower debt trajectory, lessening the chance of a downgrade.
Moody's currently has South Africa on a negative outlook, which implies that within around eighteen months the country could be downgraded. The 2019’s MTBPS projected gross debt to reach 71% of GDP by 2022/23 (from closer to 60% in the 2019 MTBPS), and to 81% by 2027/28 (from 59.3% in the 2019 MTBPS). 
For SA to return to a stable outlook, SA’s government debt projections would need to be lowered all the way back down to 2019 Budget levels, whose debt trajectory supported a stable ratings outlook from Moody’s.
SA will either return to a stable outlook, remain on a negative outlook or be downgraded after next week’s Budget. While there are some concerns SA will receive a credit watch, we believe this is very unlikely.
A credit watch is typically used when a credit situation is fluid and the outcome is uncertain. A credit watch can also be implemented when additional information is needed before a rating decision, due to the entity likely moving away from an expected trend. However, the information in next week’s budget will be comprehensive, transparent and detailed, obviating the need for a credit watch.

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SONA preview

SONA: focus on structural reforms to tackle energy crisis and revive economy

14 February 2020


The State of the Nation Address (SONA) acknowledged the prevailing critical issues of economic underperformance, heightened fiscal imbalances, high unemployment, the erosion of state capacity and restoring the longer-term sustainability of Eskom.

The key positive statements of the SONA surrounded increasing the supply of available electricity and the reduction of government spending. 
The government intends to take “measures to rapidly and significantly increase generation capacity outside of Eskom”. This includes municipalities in good financial standing being permitted to procure power from independent power producers; increased reliance on existing wind and solar plants; the opening of bids for investment in renewable energy and faster processing of applications by industry for the generation of own use electricity. The President reaffirmed the unbundling of Eskom into separate entities of generation, transmission and distribution.
The SONA recognised the fiscal predicament of unsustainably high debt levels, revenue underperformance and the unfavourable budget composition, whereby consumption spending (especially the public sector wage bill and debt-servicing costs) is crowding out public investment spending. According to the SONA, the 2020 Budget will “outline a series of measures to reduce spending and improve its composition” including the containment of the public sector wage bill.
The SONA referred to the need to enhance the ease of doing business and eliminate the “barriers to job creation”. In this regard, water use licences will be issued in 90 days, the registration of a company is now set to take a day and the efficiency of ports is also set to be addressed.
Although the SONA did not contain new decisive growth-enhancing policy initiatives, the tone suggested an impetus to get structural reforms underway. Nevertheless, policy uncertainty has not been alleviated in total and so will likely continue to undermine confidence. Specifically, the regulatory nature of expropriation without compensation has not been detailed. Whilst on universal access to quality health care, the SONA noted that mechanisms are being put in place for implementation of the National Health Insurance scheme, although it remains contested and sources of funding are unclear.

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business cycle image

Business Cycle

21 January 2020

Leading indicator lifts for two months, indicating that Q3.20 could see an improvement in economic activity over Q2.20

November 2019’s leading business cycle indicator, released by the South African Reserve Bank, lifted to 104.4 from 103.9 in October, and a reading of 103.2 in September 2019. 
The around six-month lead (between the leading indicator readings and GDP growth) indicates Q3.20 GDP is on track to see a healthier performance than that of Q2.20. While there are only just two figures (months) in the Q4.19 reading so far, they nevertheless are cheering after the Q3.19’s leading indicator indicated a slowdown in economic activity in Q2.20, worrying as Q1.20 GDP risks contraction.
Improvements in Q2.20 GDP growth would dovetail with the lift in private sector fixed investment that occurred notably from Q2.19 as the lags before the additional productive capacity fully bears fruit for the economy can take over a year. Private business enterprises saw capital expenditure growth rates of 15.8% qqsaa in the second quarter of 2019, and 10.8% qqsaa in Q3.19 (see “Q1.20 Macro-economic outlook 2020–2025”, 10th January 2020, see website address below).
More good news has come through on a recent turn around in the leading party’s stance to one supportive of both private sector energy producers and renewable energy feeding onto the grid, to improve the security of the supply of electricity in SA, and so allow faster GDP growth.
Additionally, South Africa’s President announced yesterday that State “(o)fficials and managers must possess the right financial and technical skills and other expertise. We are committed to end the practice of poorly qualified individuals being parachuted into positions of authority through political patronage”.
SA’s business cycle leading indicator may prove patchy at times but an upwards trend is expected to become more sustainable, particularly as global economic activity could improve this year.

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Tito Mboweni

Q1.20 Macro-economic outlook 2020–2025

13 January 2020

South Africa sees its growth outlook sag further on lack of sufficient regulatory reforms and repair.

South Africa is at risk of seeing an economic growth rate of below 1.0% y/y this year as a number of structural problems remain unresolved. This comes after a growth rate of likely below 0.5% y/y in 2019, not least due to substantial, periodic losses of electricity supply. However, not all areas of South Africa’s economy performed poorly in 2019.
The private sector made a substantial contribution to capital expenditure in the middle two quarters, likely returned further investment in Q4.19 above the previous quarter’s amount, and is expected to do so through 2020, providing support to GDP as the investment drive continues to gain traction. The private sector accounts for 70% of fixed investment in South Arica, while government accounts for only 16% and public corporations below 15%.
Private business enterprises saw capital expenditure growth rates of 15.8% qqsaa in the second quarter of 2019, and 10.8% qqsaa in the third quarter, with a positive outturn likely for private sector corporates’ fixed investment growth in Q4.19 as well.

Government likely returned negative rates on fixed investment in 2019 on the year before, with public sector capex down -16.3% qqsaa in Q2.19, -17.8% qqsaa in Q3.19 and -2.1% qqsaa in Q1.19. 
2020 would see further contraction in government fixed investment if projects budgeted for do not go ahead, while this is also an area that risks budget cuts as government seeks to reduce expenditure to avoid a Moody’s credit rating downgrade. Moody’s is scheduled to deliver its country review on 27th March with the Budget in February.
The ratings agency has already  placed SA’s long-term sovereign debt on a negative outlook towards the end of last year, indicating that it plans to downgrade SA to sub-investment grade, from its rating on the last rung of investment grade, if SA does not make the necessary changes that would allow its rating to return to stable.

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Business cycle

Business cycle: SARB data bodes poorly for economic growth in 2020

26 November 2019

September’s 2019’s leading business cycle indicator dropped to 103.2, from 103.8 in August. The leading indicator for Q3.19 fell to 103.6 from 104.2 in Q2.19

The six-month lead (between the leading indicator readings and GDP growth) indicates that GDP growth could slow in Q2.20 versus Q1.20.
While this is just one set of figures, they are nevertheless of concern as they indicate a Q2.20 slowdown where the first quarter of every year has contracted in SA since 2016.
Furthermore, GDP growth for Q3.19 is now at risk of coming out closer to 0% qqsaa, than the 1.9% qqsaa previously forecast. A number of sectors have seen disappointing outturns in Q3.19, including industrial production while real retail sales returned 0% qqsaa in Q3.19.
Next year, GDP growth will likely be closer to 1.0% y/y than 1.5% y/y, as structural reforms lag. The IMF warned last night that it projects South Africa’s “economic growth to remain sluggish in 2020—below population growth for the sixth consecutive year. … With low growth and low job creation, the increasing labor force is projected to exacerbate unemployment pressures, poverty, and inequality.”
The IMF’s recommendations are not new, but the creepingly slow pace at which reform is occurring in South Africa, if at all in a number of areas such as relieving the regulatory burden is continuing to damage confidence.

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SP rating image

Credit Ratings: SA is facing a country review from Standard & Poor's tonight

22 November 2019

The review will likely see the outlook on SA's BB+ rated debt dropped to negative

South Africa is expected to see a key credit rating decision from Standard and Poor’s tonight. S&P already rates SA on subinvestment grade, at BB+ local currency, and we expect the agency will deliver a negative outlook on SA’s local currency rating, and quite possibly on its BB scored foreign currency rating too.

S&P has said it “could lower the ratings if we were to observe continued fiscal deterioration, for example due to higher expenditure pressures, the crystallization of contingent liabilities, if economic performance structurally weakened, or if external financing pressures mounted.” 

In addition it has added that it “could also consider lowering the ratings if the rule of law, property rights, or enforcement of contracts were to weaken significantly, undermining the investment and economic outlook.” However, we continue to expect a switch to a negative outlook(s), not an outright rating(s) downgrade(s) yet.

The downward trend in economic growth since 2011, from 3.3% y/y to likely 0.5% y/y this year has added to the rationale for the rating downgrades SA has experienced from S&P since 2012, and indeed from Moody’s as well, and from Fitch since 2013. 

S&P says specifically that its “ratings on South Africa are constrained by the weak pace of economic growth, particularly on a per capita basis, as well as its large and rising fiscal debt burden, and sizable contingent liabilities.”

It has noted in particular that “structural impediments remain high “to improving the economic growth environment, and that “reform … (e)fforts will focus primarily on cutting costs, slimming ministerial head-counts, improving state-owned enterprises, and tackling graft.” 

“Overall reform efforts are likely to be lacklustre and unlikely to be significant enough to drive strong GDP growth.” With growth likely to be 0.5% y/y this year, instead of closer to the 1.5% y/y expected at the start of this year, weakening economic growth is likely to be one reason for instituting a negative outlook tonight.

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Moody's rating image

Credit Ratings: SA potentially is facing a country review from Moody's

1 November 2019

Review will most likely see the outlook on SA's Baa3 rated debt dropped to negative, with an actual downgrade a second in probability

South Africa will see a key credit rating decision from Moody’s tonight (the agency is expected to deliver a review this time around) and while we continue to expect the agency will deliver a negative outlook on SA’s rating, the possibility of receiving an actual downgrade is also material.

Given the plans outlined to stabilise public finances outlined in the MTBPS (see MTBPS Snapshot: an extreme ramp up in debt to GDP projections makes a Moody’s credit rating downgrade substantially more likely, 30th October 2019, see website address below) a ratings watch seems unlikely however.

A negative outlook on SA’s Baa3 rating would signal a rating downgrade in around eighteen months, unless factors change which would support a stable or positive outlook. A ratings watch shortens the time period to three months for the downgrade to the rating (of Baa3 to Ba1) to occur, if the ratings watch is not removed. 

The MTBPS outlined a number of key areas in which to reduce expenditure and stabilise public finances (rating agencies assess sovereigns ability to repay their debt), which would typically take longer than three months to complete (closer to a few years in a number of cases).

With little possible in three months to turn around the projected debt and deficit picture outlined in the 2019 MTBPS, a ratings watch would likely be just a signal of an unavoidable, impending credit rating downgrade, and as such the agency could by the same token just effect the actual downgrade to sub-investment grade.

The 2020 Budget in February will likely give a much clearer picture of whether the projections treasury has given to government on its finances, including those on civil service salary and wages, are likely.  Civil servant remuneration sits around 45% of expenditure due to a near decade of above inflation increases.

In particular, National Treasury aims for a primary balance (revenue equating non-interest expenditure) during the Medium-Term Expenditure Period (MTEF) by 2022/23, and indeed 2021/22 would already provide evidence of whether this fiscal target can be achieved, with fiscal performance over 2020/21 also key. 

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MTBPS Snapshot

MTBPS Snapshot: An extreme ramp up in debt to GDP projections

31 October 2019

This makes a Moody’s credit rating downgrade substantially more likely, and a revision to a negative outlook a certainty (unless the outlook downgrade is bypassed)

2019’s Medium–Term Budget Policy Statement (MTBPS) projected a massive deterioration in government’s debt to GDP projections and fiscal deficits. Over the medium-term gross debt is not projected to stabilise, rising instead from 61% of GDP this fiscal year to 71% of GDP by 2022/23, and to 81% by 2027/28 on the current trajectory. 

There is a very material deterioration in gross debt projections from the Budget presented in February this year, where gross debt of 55.6% of GDP was estimated for 2019/20 but 60.8% (of GDP) is now projected, the 2020/21 debt projection is now 64.9% (previously 56.2%) and 2021/22 at 68.5% from the previous estimate of 57.8%.

As the purpose of credit rating agencies in assessing the rating on a sovereign’s debt is to assess the likelihood of the sovereign’s ability to repay that debt, the massive upwards revision of SA’s projected debt trajectory, and lack of total expenditure cuts, make further downgrades from all the credit rating agencies much more likely. Expenditure continues rising each year.  

The rand reacted negatively, weakening to R15.07/USD, R16.76/EUR and R19.41/GBP, from R14.64/USD, R16.24/EUR and R18.86/GBP before the budget, as the markets build in the certainty of a Moody’s credit rating downgrade. The yield on the R186 government bond rose to 8.38% from 8.20% before the release of the MTPBS. 

The 2019 MTBPS is undoubtedly credit negative for the rating agencies on the back of the dramatic deterioration in the fiscal metrics, with the fiscal deficit as a % of GDP now projected at -5.9% of GDP for 2019/20 (previously expected at -4.5%), -6.5% of GDP for 2020/21 (previously -4.3%), -6.2% in 2021/22 (previously -4.0%) and -6.2% in 2022/23.  

While GDP growth continues to remain insufficient to halt the upwards trajectory of gross debt (a growth rate in excess of 2.5% y/y every year is needed to assist in reversing the trajectory), and ongoing financial support to ailing SOEs, particularly Eskom, has added to the burden.

Eskom’s debt at R440bn, or 15% of GDP, remains a heavy burden on government, around R300bn of which is guaranteed by government, which has taken on the coupon payments of these contingent liabilities, leading Moody’s to assume the Eskom debt as part of that of South Africa, lifting the sovereign debt profile.    

The MTBPS also focusses on the macroeconomic reforms to restore economic growth, in an environment of a synchronised global economic slowdown which is negative for economic growth in SA. National treasury revised down its growth forecast to 0.5% y/y for this year (previously 0.7% y/y), and 1.2% y/y next year from 1.5%.  

The overriding  concern is the ongoing fiscal slippage as public finance figures deteriorate each year, and fiscal consolidation remains elusive as South Africa moves ever closer to an unsustainable debt trap. Today’s budget may hope for faster economic growth to turn the deterioration around, but does not realistically expect it.

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FOMC cuts by 25bp as expected, but rand fails to strengthen

19 September 2019

Market disappointment in the US Federal Open Market Committee not giving a clearer indication of further US rate cuts sees the rand making little traction. The local currency will continue to draw its direction from global market risk sentiment.

As widely expected, the US Federal Open Market Committee lowered the target range for the federal funds rate to 1.75% - 2.0%, from 2.0% - 2.25%. Three committee members voted against the cut, with two preferring that the fed funds target rate was left unchanged and one that it was cut to 1.50% - 1.75% instead.
The FOMC again highlighted global growth concerns in its decision to cut, stating “in light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate.”
The Committee also reiterated that “although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent.”
The rand had already priced in the 25bp US rate cut, with the domestic currency trading similar to its close of yesterday of R14.69/USD, R16.20/EUR, R18.33/GBP at R14.66/USD, R16.21/EUR, R18.30/GBP currently, as the recent conflict-led escalation in the oil price also has taken the shine off risk sentiment along with Fed caution.
The dot plot chart of the FOMC detailing each individual member’s annual forecasts of the midpoint of the target range or level of the federal funds rate showed a distinct lowering in the September forecasts compared to June over the period 2019 to post 2022, with just under half seeing the rate below 1.75% this year.
However, with only seven of the seventeen members expecting one more cut this year, the rand did not take cheer from the FOMC tone, as it was not seen as significantly dovish. The differences amongst members on the interest rate outlook could reduce if risks of a marked global slowdown are seen to elevate.
While US bond yields have indicated the risk of a slowdown in US economic growth this year (its yield falling below those of key three month rates), Powell is reported to say last night that the Fed could engage in a “sequence” of interest rate cuts if economic conditions warranted it, but did not see the need for this currently.
However, Governor Powell did indicate the potential for growth in the Fed’s balance sheet to assist money markets, reportedly stating  “and we’re going to be assessing the question of when it will … (be) … appropriate to resume the organic growth of our balance sheet.”
He is reported to have added “for the foreseeable future, we’re going to be looking at, if needed, doing the sorts of things we did in the last two days, these temporary open market operations. That’ll be the tool that we use”.
The FOMC is consequently likely to remain heavily data-dependent in its rate-setting, and with the September FOMC meeting now out of the way, the rand will continue to draw direction from global market risk sentiment, while the MTBPS now looks to be delayed to 30th October 2019, if not later, and Moody’s decision thereafter.
With the MTBPS crucial in a number of areas from the debt to GDP projections, indications on future taxation and spending, particularly support for SOEs; tax buoyancy is sagging along with GDP growth, and public sector funds frittered away through corruption have yet to be recouped, all of which is also quelling business sentiment.
With markets even seeing a hawkish tilt to last nights FOMC tone, expectations of no change in SA interest rates at today’s MPC meeting have been bolstered. Market disappointment on the FOMC not giving a clearer indication of further US rate cuts has also seen the rand making little traction this morning. 

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